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Airline hubbing and airport economics in the pacific market
Tmnspn. Res..A. Vol. 24A. No. 3. PP. 217-230. Prmcd in Great Bnrain.
AIRLINE
Institute
0191-260: 90 S3.fYJ+.LW 9 1990 Rrgamon Press plc
19%
HUBBING
of Transportation
AND AIRPORT ECONOMICS PACIFIC MARKET
MARK HANSEN and ADIB KANAFANI Studies and Department of Civil Engineering, Berkeley,CA 94720, U.S.A.
(Received 18 July 1989; in revisedform
1 November
University
IN THE
of California,
1989)
Abstract-Transpacific hubbing over Tokyo’s Narita airport, which is beset by severe capacity problems while serving a high proportion of nonlocal passengers, is explored from both a historical and an economic standpoint. Tokyo developed into Asia’s dominant transpacific gateway because it was within range of the continental U.S. for the first generation of transcontinental jets. Its dominance continued after the introduction of the B747, while a more dispersed pattern of service developed on the U.S. side of the transpacific route system. Reasons for Tokyo’s continuing dominance include its strong local market and the liberal fifth freedom rights of U.S. airlines out of Tokyo. A model of airline network competition is applied to the U.S.-Asia market. The model simulates the behavior of profit-maximizing airlines with different network types and hub locations, finding states of Cournot equilibrium. In a baseline run corresponding to the 3rd Quarter, 1985 system, the predicted transpacific network corresponds quite closely to the actual one. The impacts of demand growth, high terminal costs at Tokyo, and strengthened connectivity of alternative Asia hubs are then explored. Tokyo traffic is found to increase at a somewhat slower pace than overall demand as new non-stop services become feasible. Connecting traffic through Tokyo is found to be highly price sensitive because of the availability of alternative routings. Strengthening the connectivity of alternative Asian hubs, on the other hand, has a fairly modest effect on the distribution of traffic in the system. The results point to the need for Japan to carefully assess the costs and benefits of its role as Asia’s dominant transpacific gateway.
barriers to expansion. Since 1984, total passenger traffic between Japan and the rest of the world has increased at an annual rate of 12%, and such doubledigit growth in expected to continue into the 1990s (Ellwand, 1989). The additional traffic is composed primarily of Japanese tourists and passengers to and from other East Asian countries, for which Tokyo serves as the primary transpacific gateway. Expansion is slowed by local environmental and political opposition (Aviation Week, 1989; Hara, 1989; Manabe and Sakai, 1980) and, more fundamentally, by a severe land shortage resulting in extremely high land acquisition costs despite the large distance (66 km) between the airport and downtown Tokyo. In the face of the high social and economic costs of Japanese airport development, there is an urgent need to allocate existing capacity wisely and scrutinize new projects carefully. As a case in point, although international traffic to and from Tokyo must use Narita, it is less clear that connecting traffic must do so. Yet, comparison of total passenger volumes with origin-destination information reveals that, in the third quarter of 1985 (the only period for which the necessary data could be obtained), 55% of the passengers flying from the U.S. to Narita were on their way to elsewhere. Connecting traffic to and from the U.S. alone accounted for nearly 30% of Narita’s total passenger volume for this time period. It is only reasonable to ask whether this is an appropriate use of scarce airport resources. In this paper, we explore Tokyo’s role as a transpacific hub and the prospects for reducing that role. In
1. INTRODUCTION
Tokyo’s Narita airport, Asia’s premier transpacific gateway, has severe terminal and airside capacity problems. In 1988, 15 million passengers passed through its terminal, which was designed for 7.5 million (Jane’s Information Group, 1988; Manabe and Sakai, 1980). In response, airport authorities have been forced into a series of stop-gap measures: turning storage rooms into offices, building a temporary lounge, removing hand-rails to free extra floor space! Some airlines have resorted to accommodating connecting passengers at nearby hotels during their layovers (Jane’s Information Group, 1989). On the airside, Narita’s capacity is limited by its single runway, environmental concerns, and the conservatism of its air traffic controllers. With its daily quota set to 340 operations in the summer of 1989, Narita requires a week to handle the same volume of traffic passing through Chicago O’Hare in a day. Tight slot controls are required to meet this limit. These have forced Japan Airlines to curtail service in some markets in order to expand in others, and prevented All-Nippon Airways from having the same daily departure times for its five-day per week service to Seoul (Hara, 1989). Capacity limitations are preventing the inauguration of several newly authorized international services, and are causing Japanese reluctance to authorize new services under the U.S.Japan bilateral (Sanger, 1989). These airside and landside capacity constraints are caused by rapid demand growth and significant 217
M. HANSEN and A. KANAFAN
218
Section 2, we take a historical perspective, tracing the emergence of Tokyo as a transpacific gateway since World War II. We then shift to an economic perspective in Section 3, using a model of airline network competition to explain the structure of the existing transpacific network and Tokyo’s role in it. We use the same model prospectively in Section 4, to investigate how Tokyo’s hub traffic may respond to demand growth, cost changes, and the development of competing hubs. We summarize the conclusions of the analysis in Section 5. 2. THE
EMERGESCE OF TOKYO AS A
TRANSPACIFIC GATEWAY
Figures 1 and 2 trace the development of transpacific air service by showing the number of and gateway distribution of flights between the U.S. and Asia in the summers of 1947, 1958, 1968, 1978, and 1985. These figures reveal that substantial structural change has accompanied the system growth over these years. The emergence of Tokyo as a transpacific gateway was triggered by the development of longer range commercial aircraft in the late 1940s. Prior to this time, transpacific air traffic followed a southerly course, hopping from the U.S. terminus at San Francisco, to Hawaii, Midway Island, Wake Island, Guam, Manila, and Hong Kong. This route was considerably longer than the great circle one, which passed through Alaska, Siberia, and Japan, but the
latter required a stop in Siberia which the Soviet government refused to allow (Davies, 1972, pp. 247248).
For the northern route to be feasible, therefore, an aircraft with adequate range to overfly its Siberian portion was required. This appeared, in the form of the Douglas DC-4, in 1946. One year later, Northwest Airlines was awarded routes from Seattle and Minneapolis to Manila via Anchorage, Cold Bay, and Tokyo. With this, the development of the Tokyo as a transpacific gateway was begun. Intially, however, this development was slowed by a combination of circumstances. Although the northern route was 650 miles shorter, this advantage was offset by its stops in cold tundra1 wastelands rather than lush tropical islands. Thus, in 1947, the majority of transpacific flights continued to follow the southern route. With its locational advantage closely tied to the northern route, and the attractiveness of that route reduced by frigid stopovers, Tokyo’s role in the transpacific route system continued to be limited. By the mid-19jOs, further technical development of commercial aviation, combined with the postwar economic development of Japan and the outbreak of the Korean War, had dramatically increased transpacific services into Tokyo. With Northwest’s acquisition of the Lockheed 1049G, nonstop service from Seattle to Tokyo became possible. Meanwhile, Pan Am could now conveniently extend the southern
250
q TPE q SEL •j
OS*
q NRT
FLTS/WK
H
MNL
q HKG w GUM
0 1947
1958
1968
1978
1985
YEAR Fig.
1. Transpacific
flights to Asian gateways,
by year.
219
Airline hubbing and airport economics 250
q SF0 q SEA @j ORD FLTS/WK
1947
1958
1968
1978
n
LAX
n
JFK
0
HNL
n
ANC
1985
YEAR
Fig. 2. Transpacific flights to U.S. gateways, by year.
route to Tokyo, offering non-stop service from Honolulu using the DC-7C. The Japanese economy grew at a rapid pace, its GDP more than doubling between 1950 and 1959. In response to these developments, service to Tokyo more than doubled between 1947 and 1958, while there was little or no increase in transpacific services not involving Tokyo. Tokyo’s Haneda airport, with its recently completed international terminal, could by the late 1950s justifiably claim to be the premier transpacific gateway to Asia. The introduction of jets into commercial service in the late 1950s provided an additional, powerful, stimulus for transpacific air travel, and further strengthened Tokyo’s locational advantage as a transpacific gateway. Travel time from Tokyo to Seattle was reduced from 18 to 8 hours, and unit operating costs also dropped sharply. These trends combined with rapid economic growth on both sides of the Pacific to generate a three-fold increase in transpacific air travel demand between 1959 and 1965. During this period, moreover, Tokyo was the only major Asian destination within the range of flights originating in the 48 states. The result was a quadrupling of flights between the U.S. and Japan-from 21 to 86 flights per week- between 1958 and 1968. Accompanying the increases in transpacific service into Tokyo was a comparable increase “beyond” flights between Tokyo and other Asian points. The ability of U.S. flag airlines to offer one stop and connecting service through Tokyo to other Asian points derived from a liberal bilateral agreement ne-
gotiated between the U.S. and Japan in 1952. In addition to allowing U.S. airlines-with U.S. government approval -virtually unrestricted service between the U.S. and Japan, the agreement was extremely liberal with respect to fifth freedom rights (United States, 1953). The U.S. airlines could therefore tap the local Japanese market in order to make intra-Asian flights economically viable. Consequently, the transpacific flights of U.S. airlines rarely terminated in Tokyo, but instead continued on to other East Asian destinations such as Seoul, Hong Kong, Singapore, and Bangkok. Like the connecting hubs of today, Tokyo served as an interchange point for passengers traveling to these other points. With the advent of widebody jets in the early 197Os, transpacific route development took another turn. Although market growth continued, it was mainly absorbed through larger aircraft rather than increased flights. Total service between the U.S. and Asia increased only about 25% from 1968 to 1978, but the aircraft used were mainly 350 seat 747s rather than DC-8s and 707s of about half that size. The greater range of the widebody aircraft resulted in the initiation of non-stop service to Hong Kong, Taipei, and Seoul. These new services were, however, quantitatively insignificant when compared to service to Tokyo, which in 1978 continued to be the first stop for over 80% of flights between the U.S. and Asia. Although concentration on the Asian side of the transpacific route system continued to be high, a more dispersed pattern developed on the U.S. side of
>I. HANSEX
220
and
the system. In 1968, over three quarters of the flights between the U.S. and Asia departed from Honolulu, while by 1978 this share had slipped to about 55%. There are several possible causes for this divergence in development patterns on the two sides of the Pacific. First, Honolulu Iacked the 1ocaI market strength of Tokyo, and was not Iocated along the great circle route. Second, political pressures encouraged an even distribution of service among U.S. gateways. Finally, service concentration in Asia complemented service dispersion in the United States. By funneling virtually all transpacific passengers through Tokyo, it was possible to sustain transpacific links from gateways lacking sufficient passenger volumes to any one Asian destination. The last decade has witnessed some reduction in Tokyo’s dominance. Although flights between the U.S. and Tokyo more than doubled between 1978 and 1988, the proportion of transpacific flights from the U.S. stopping at Tokyo fell to about 65%. This change derives from airport capacity constraints at Narita, rapid market growth among other East Asian countries, and efforts on the part of the United States to pressure the Japanese to ease economic regulation of international aviation. The latter resulted, in the late 197Os, in a strategy of negotiating liberal bilateral agreements with other East Asian nations. It was hoped that by “encircling” Japan with liberal bilaterals, it would be pressured to moderate its policy (Kasper, 1988, pp. 82-87). This approach has had little success with Japan and often resulted in conflicts with its neighbors, but it does appear to have spurred service increases to non-Japanese destinations. Although network concentration on the Asian side of the Pacific has declined in the last decade, it continues to significantly exceed that on the North American side. Honolulu’s share of transpacific flights from the U.S. dropped from 55 to 35%. This decline reflects a rapid service expansion at established mainland gateways such as San Francisco, Los Angeles, Seattle, and Chicago. This trend has been encouraged by the increase of hubbing on the U.S. domestic network: connecting hub airports, with their strong domestic connections, are ideal consolidation points for international traffic.
3. MODELISC
THE TRANSPACIFIC ROUTE SYSTEM
The historical development of the transpacific route system offers some clues to its course of future development, but it also shows that development trends shift over time. In order to better understand how the network may evolve in the future, a computer model called ALIGATER (AirLine GAteway Traffic EstimatoR) was developed. This model explicitly includes a number of the underlying forces that shape network structure. The structure of the model is shown in Fig. 3. The inputs define a set OD markets and a set of competing airlines, each of which has a specified network type (elaborated below), predetermined gateway loca-
A. KA.L~AFANI
tion(s), as well as a set of available aircraft with specific ranges, seating capacities, and operating cost characteristics. Also specified for each airline is a set of points to which it has intracontinental feed links. The airIines included in rhe model have one of rwo types of networks, as shown in Fig. 4. The first type of network involves a single intercontinental hub which may be located in either of the two continents (in this application, North America or Asia). This type of airline has predetermined intracontinentat feed links between its hub and other North American or Asian points. It can offer transpacific service to points on the other continent. The intercontinental segments served, and the frequency of service, are determined endogenously, in a manner discussed betow. The second type of network involves two hubs, one on each of the two continents, and each with intracontinental feed links. In this type of network, only the intercontinental segment between the two gateways is served, again with a frequency that is determined endogenously. In addition to these airline specifications, the model requires as input the fare level on each intercontinental segment, the level of demand in each intercontinental market, and the great circle distances between all points. The demand data must reflect true origins and destinations rather than mere segment flows. Finally, the model requires as input the specification of a togit model of airline passenger route choice. Among the variables included in the logit model are type of routing (nonstop, one-stop, or two-stop), routing circuity, and transcontinental service frequency. The basic output of the model is a set of intercontinental service frequencies that define a state of Cournot equilibrium. In other words, the set of frequencies is such that each airline is maximizing its profit, given the frequencies of the other airlines. The profit functions used to determine the equilibrium derive from the demand, cost, and fare data and the choice model parameters. One-hub airlines derive revenue by generating local traffic on each intercontinental segment, and connecting traffic between each overseas point that is served and each point to which it has feed service from its gateway. Two-hub airlines generate revenue from three types of traffic, local nonstop between the two hubs, connecting one-stop between a hub on one continent and a nonhub the other, and two-stop service between two nonhubs. Both one and two-hub airlines incur costs from operating the transcontinental services and, in some situations, from providing the feed services. The profit is then simply the difference between the revenue generated and the costs incurred. It is easily shown that, assuming reasonable values for the choice function parameters, these functions are concave, making their maximization a straightforward matter. A cobweb algorithm-involving sequential maximization of each profit function-has been found an effective means of reaching equilibrium.
Airline hubbing and airport economics
221
lnlemational Origin-Dertmation _ Demand Table
Fares on Intercontinental Segments
lnteKi1y Distances
Passenger Route Choice Model
-
-
-
Profit Maximization Hypothesis
Courn01 Hypotherir
b
*
.
Fig. 3. Model structure.
Feeder -
(a)
One-hub
Airline
(b)
Two-hub
Airline
routes
Intercontinental
(frequency routes
exogenous) (frequency
endogcnous)
Fig. 4. One-hub and two-hub airline networks. m(A)
24:3-E
M. HANSEN and A. KANAFANI
222
The ALIGATER model drastically simplifies the situation faced by real world airlines, and is not intended to forecast their behavior in detail. Rather, it is used to explore how the basic forces of aircraft operating economics, air traveler service preferences, demand patterns, and geography shape airline networks in a competitive environment. Accordingly, we defined a set of airlines with the intention of portraying a set of generic routing possibilities rather than individual real world carriers. The set of airlines we defined included 13 one-hub and 20 two-hub airlines. These airlines are characterized in Table 1. The first 21 of the airlines listed in Table 1 are used in the initial, baseline, model run; the remainder are introduced in subsequent runs as discussed below. Each was given a single aircraft -a Boeing 747-200-for use in transpacific service. One-hub airlines were assumed to have feed available between their gateway and all other points on the same continent. Likewise, two-hub airlines were assumed to have unrestricted feed from both of their gateways. Data for estimating the choice model (a multinomial logit model) specifically for the transpacific route system were unavailable. Therefore, we estimated parameters for this application on the basis of earlier studies (Ghobrial and Kanafani, 1985; Hansen and Kanafani, 1989; Hansen, 1989). The following choice function was used:
v= - 1.0s+ ln(!--)I(S+ l)-0.003c
where V is the choice function value; S is the number of stops; F is the transcontinental service frequency (per week); C is service circuity, measured as the difference between the length of the routing and the great circle distance between the origin and destination. The first term of the choice function implies that, if two services had identical values for the other components of the function but one of the services had one more stop, the ratio of their market shares would be about 0.37 (which is lie). This reflects a strong passenger preference for fewer stops. The second term indicates that market share is a linear function of transcontinental frequency share for nonstop services, but that the dependence of market share on frequency declines with the number of stops. This weakening dependence derives from the fact that airlines coordinate feed with only selected transoceanic flights. Finally, the third term in the choice function implies that, if the circuities of two otherwise identical services differed by 500 miles, the market share of the more circuitous service would be about one-fifth that of the less circuitous one. The penalty of the added circuity arises both from the extra travel time and from the assumption that the total fare paid by the passenger is based on the length of his route. Assuming a value of time of S20 per hour, about */a of the disutility of circuity is the result of the extra fare paid.
The other main assumptions used in applying the model are summarized in Table 2. Aircraft cost data are based on Form 41 reports the U.S. DOT. A model of block hours as a function of segment length, and a set of additional costs associated with aircraft operation (for items such as landing fees and flight attendants) are based on the CAB Large Aircraft Costing System (U.S. Civil Aeronautics Board, 1984). The range value was obtained from Jane’s All the World’s Aircraft, and the capacity value is based on average available seats per aircraft on Pacific routes computed from data published by ICAO. The segment revenue, estimated at 0.07 per statute mile, represents the net revenue after subtracting traffic-related expenses such as food, baggage handling, and ticketing. Data concerning these expenses were also obtained from the Large Aircraft Costing System. The maximum load factor of 75% was derived from ICAO reports for the Pacific for the third quarter of 1985. Without the maximum load factor constraint, the passenger volume attracted could exceed the seating capacity provided by a given service. Seventy-five percent is intended to represent the load factor at which a typical airline would consider adding capacity in the absence of fleet limitations or regulatory constraints, not as an absolute upper limit. Lastly, the minimum service frequency of three flights per week reflects the minimum frequency observed in transpacific markets in 1985. Cost and marketing considerations not explicitly represented in the model are assumed to make lovver frequency levels economically unfeasible. A major difficulty in the analysis of international aviation issues is the lack of true OD data. ICAO publishes international flight stage traffic data, and the United States Immigration and Naturalization Service (INS) publishes data on passenger flows between U.S. and foreign gateways. Neither of these sources can be used to establish the ultimate origin and destination of passenger traffic, however. It was therefore necessary to combine ICAO and INS data, data from the U.S. domestic origin and destination survey, and a number of simplifying assumptions to arrive at an estimated true OD table. Details of this estimation procedure will not be discussed here, but can be obtained from the authors upon request. There is an urgent need for better sources of true OD data to support future research in international civil aviation. The base run produced an approximate equilibrium state by the fifth round of frequency optimization. The largest frequency change in this round was l.l%, and the vast majority of frequency values changed less than 0.1% Table 3 summarizes the operations of each airline at the end of round 5. Either the minimum frequency constraint or the maximum load factor constraint is binding on all service frequencies. The minimum frequency requirement is binding on 10 of the 34 services offered. Such low frequencies are less common in the actual system. The discrepancy derives from the fact that, although three flights per week is rea-
Airline hubbing and airport economics
223
Table 1. Airlines used in simulations Airline
U.S. Hub
Asian Hub
Scenarios
Feed
None None
B747-200 B747-200 B747-200 B747-200 B747-200 B747-200
To all To all To all To all To all To all
U.S. U.S. U.S. U.S. U.S. U.S.
points points points points points points
All All Ail All All All
Bangkok Hong Kong Seoul Shanghei Singapore Taipei Tokyo
B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200
To all Asia To all Asia To all Asia To all Asia To all Asia To all Asia To all Asia
points points points points points points points
All All All All All All All
Chicago Honolulu Honolulu Los Angeles New York San Francisco San Francisco Seattle
Tokyo Guam Tokyo Tokyo Tokyo Tokyo Tokyo
B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200
To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia,
U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S.
points points points points points points points points
All All All All All All All All
Chicago Chicago Honolulu Honolulu Los Angeles Los Angeles New York New York San Francisco San Francisco Seattle Seattle
Seoul Taipei Seoul Taipei Seoul Taipei Seoul Taipei Seoul Taipei Seoul Taipei
B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200
To all Asia, To all Asia, To all Asia, To all Asia, To all Asia. To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia,
U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S.
points points points points noints boints points points points points points points
II. IV II, IV II, IV II, IV II, IV II, IV II, IV II, IV 11, IV II, IV II, IV II, IV
Chicago Honolulu Los Angeles New York San Francisco Seattle
None
7 8 9 10 11 12 13
None None None None None
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33
1
2 3 4 5 6
Aircraft
None
None
Hong Kong
sonable as an absolute minimum level of service, airlines display a strong preference for more frequent service because of the supposed marketing advantages it offers. In the cases where the maximum load factor constraint is binding, the level of competition is not strong enough to induce airlines to offer more flights at reduced load factors. This suggests that, although many airlines participate in the transpacific market, exposure to competition is substantially lessened by differences in the airlines’ service rights and access to feed traffic. Comparisons of the model results with observed transpacific service frequencies are summarized in Figs. 5 and 6. The predictive accuracy of the model is Table 2. Model input values Input Variable Aircraft Operating Cost (per departure) Aircraft Operating Cost (per aircraft-mile) Aircraft Range (statute miles) Aircraft Seating Capacity Maximum Load Factor Minimum Service Frequency (flights per week) Net Revenue (per passenger-mile)
Value $13200 512.43 7500 350 15% 3 SO.07
good in light of its simplicity and the dubious reliability of the OD data. The model forecasts a total of 234 weekly flights from the U.S. (excluding Alaska) to East Asia, whereas in the actual number of flights was 236. The correlation between predicted and actual frequencies on transpacific segments, plotted in Figure 5, is 0.90. When total transpacific operations for U.S. and Asian gateways are compared (Fig. 6), agreement is somewhat better, with correlations just under 0.99 in both cases. The Theil inequality coefficients (Theil, 1966) are 0.17 for individual segments, 0.085 for Asian gateways, and 0.047 for U.S. gateways. The covariance components predominate with the exception of the Asian gateways, where the contributions of the variance and covariance components are roughly equal. The Asian gateway results reflect a disparity between forecast and actual level of flights into Tokyo. Whereas the model predicts 133 weekly flights from the U.S. to Tokyo, the observed number is 151. This underprediction for Tokyo is offset by overpredictions of weekly flights to Guam (13 predicted, 5 actual), Seoul (29 predicted, 22 actual), Shanghai (4 predicted, 0 actual), and Singapore (4 predicted, 0 actual). Assuming that these discrepancies do not derive from erroneous demand data or inaccurate mod-
M. H~VSEN and A.
224
Table 3. Summary Airline No. 1 2 2 2 2 3 3 3 4 5 5 5 5 5 6 6 6 7 8 9 9 9 9 9 9 9 10 10 II 12 12 I2 12 13 13 13 13 13 14 14 I5 15 16 16 17 17 18 18 19 19 20 20 21 21
or airline operations, Flights/ Week
Segment SYSTEM Honolulu Honolulu Honolulu SYSTEiM Los Angeles Los Angeles SYSTEXI SYSTEM San Francisco San Francisco San Francisco SYSTEM San Francisco Seattle SYSTEM Seattle SYSTElM SYSTEM Washington DC Los Angeles San Francisco Honolulu Chicago New York SYSTEM SYSTEIM New York SYSTEM Honolulu Los Angeles San Francisco SYSTEM New York San Francisco Los Angeles Honolulu SYSTEbl Chicago SYSTEM Honolulu SYSTEM Honolulu SYSTEM Los Angeles SYSTE,M New York SYSTEM San Francisco SYSTEM San Francisco SYSTEM Seattle SYSTE&l
Manila Singapore Osaka Taipei Hong Kong
Bejing Hong Kong Taipei Guam
Hong Kong Seoul Seoul Seoul Seoul Seoul Seoul Seoul Shanghai Taipei Taipei Taipei Tokyo Tokyo Tokyo Tokyo Tokyo Guam Tokyo Tokyo Tokyo Hong Kong Tokyo Tokyo
el parameters, they suggest an excessive level of transpacific hubbing over Tokyo in 1985, resulting in fewer-than-expected flights to some alternative gateways and a lack of non-stop service altogether to others. 4. MODELISG THE TRANSPACIFIC SYSTEM-FUTURE
KA.AFANI
ROUTE
SCENARIOS
Although ALIGATER’s prediction of the 1985 network was not fully accurate, we considered it close
baseline
Revenue
equilibrium
cost
Load Factor (%)
Profit
0
0
0
0
0.0
7 4 6 17 3 3 6 0 3 3 3 13 4 5 9 4 0 0 3 6 3 4 3 5 24 4 4 0 6 4 3 13 3 4 10 21 38 8 8 0 0 23 23 18 18 10 10 5 5 7 7 10 19
647059 434208 475251 1556525 319549 371678 691227 0 317601 336819 347206 1413327 411700 612231 976590 364358 0 0 379048 701612 278053 358015 302885 677186 2696799 522841 52284 I 0 600698 524556 311002 1436257 369118 403939 950419 1432938 3156414 959777 959777 662994 662994 1603918 1603918 1794630 1794630 1269301 1269301 581431 581431 1620662 1620662 1647875 1647875
525249 340213 404608 1270070 293023 309617 602640 0 259797 297199 2807 17 1166827 329113 481790 778990 297200 0 0 298691 558746 249617 298834 283029 528628 2217546 404610 404610 0 491414 410140 280717 1182271 290748 330290 76882 1 1246083 2635942 758527 758527 573590 573590 1387553 1387553 1451339 1451339 994970 994970 453452 453452 1324542 1324542 1364707 1364707
121810 93995 70650 286455 26526 62061 88587 0 57804 39620 66489 246500 82587 13044 1 197600 67158 0 0 80357 142866 28435 59181 19856 148558 479253 118231 118231 0 109284 114416 30285 253985 78369 73650 181598 186855 520473 201251 201251 89404 89404 216364 216364 343290 343290 27433 1 27433 1 127978 127978 296120 296120 283169 283169
75.0
75.0 75.0 75.0 63.9 69.8 66.9 0.0 73.2 66.3 73.0 72.1 75.0 75.0 75.0 75.0 0.0 0.0 74.3 75.0 67.2 74.9 63.1 75.0 72.5 75.0 75.0 0.0 74.9 75.0 65.4 72.9 74.6 75.0 75.0 71.6 74.7 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0
enough to justify its use in exploring future possibilities for network development and their implications for hubbing over Tokyo. We examined four scenarios designed to explore how demand growth, increased congestion costs, and the formation of hubs at other points in Asia would affect network development in general, and activity at Tokyo in particular. Table 4 summarizes the four scenarios and compares them to the baseline run discussed above. The first scenario involved a uniform 50% increase in demand. It was initialized with the equilibri-
Airline hubbing
and airport
225
economics
25 ACTUAL (FLTS/wK)
0
5
15
10
20
MODEL Fig. 5. Model vs. actual transpacific
25
30
35
(FLTS/WK) flights,
by segment.
WAS SF0 SEA ORD LAX HNL JFK TPE GATEWAY
SIN
I
SHA SEL PEK OSA NRT MNL HKG GUM 0
20
40
60
60 100120140160
FLTS/WK Fig. 6. Model vs. actual transpacific
flights,
by gateway.
40
45
M. HAMEN and A. KAKAFAXI
226 Table 4. Scenario descriptions Scenario
Demand
Narita Costs
Airlines*
Baseline I II III
3rd Q, 1985 50% over Baseline 50% over Baseline 50% over Baseline
1-21 I-21 l-33 1-21
IV
50% over Baseline
Normal Normal Normal 40% over Normal 20% over Normal 40% over Normal
1-33
*For description of airlines, see Table 1. urn frequencies from the base scenario. In the fifth round of optimization, the maximum frequency change was 1.7%, indicating that an approximate new equilibrium state had been established. In the new equilibrium state, there are 349 flights per week between the U.S. and Asia, an increase of just under 50%. The flight increase is slightly less than the demand increase because fewer services were constrained by the minimum frequency constraint under the demand growth scenario. Although the demand growth is assumed to be uniform, its impact on flight frequencies is not. Total transpacific flight growth from the Asian gateways and U.S. gateways resulting from the increased demand is summarized in Fig. 7. For Asian gateways, there is a fairly consistent pattern in which the gateways with the lowest numbers of flights in the baseline have the highest percentage increases in flights.
This trend results from new routes becoming feasible as demand increases, and from the disparities in the sensitivity of service attractiveness to transpacific flight frequency among the different service types. The overall impact of these phenomena is to divert some connecting traffic away from the major Asian gateways-especially Tokyo - and increase flights into cities such as Hong Kong, Taipei, and Manilla. The only cases where this effect is not seen are those in which the minimum frequency constraint was initially binding, resulting in extra capacity which absorbs some of the demand increase before additional flights are required. Unlike the Asian gateways, the U.S. ones exhibit no clear relationship between percentage flight growth and the baseline number of flights. In this case the dispersive impacts of demand growth found for the Asian gateways are counteracted by the opening of new nonstop routes. For example, the dispersive effect causes Honolulu to have only a 42% increase in flights to Tokyo, but at the same time it receives new nonstop service to Hong Kong and a second airline offering service to Singapore. The net result is an increase in transpacific flights of almost exactly 50%. The difference in impact of demand growth on service distribution derives from the differences in the degree of concentration noted earlier. With the baseline network so strongly focussed on the Tokyo
150%
125%
100%
FLIGHT INCREASE
u m U.S.
75%
0 ASIA
50%
25%
0
20
40
60
BASELINE
60
100
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FLIGHTS
Fig. 7. Impact of 50% demand growth on gateway flights.
Airline hubbing and airport economics gateway, the loss of connecting traffic through Narita is more important than any gains arising from the opening of new nonstop segments. For all other transpacific gateways-on both sides of the Pacifictraffic growth from new services either counteracts or dominates the loss of connecting passengers. Although demand growth results in a less-thanproportional increase in transpacific traffic hubbing through Tokyo, this is unlikely to significantly alleviate the capacity shortage there. The ALIGATER model was therefore used to explore ways of further shifting of connecting traffic from Narita to other points in the system. Two specific possibilities were considered. One is to encourage transpacific traffic to connect through alternative Asian gateways by establishing two-hub airlines at these gateways. The second approach entails raising the terminal costs associated with operations in and out of Narita. In the alternative routing approach, Scenario II, 12 two-gateway airlines numbered 22-33 are added. Six of these airlines have their Asian gateway at Seoul, and six at Taipei. Both the Seoul group and the Taipei group consist of carriers with U.S. gateways at Honolulu, Chicago, Los Angeles, New York, Seattle, and San Francisco. These groups are completely analogous to the six Narita-based two-gateway airlines included in the baseline and growth scenarios. In the real world, they could reflect either expanded use of fifth freedom rights out of Seoul and Taipei by U.S. airlines, or strengthened U.S. feed for Korean or Taiwanese airlines, perhaps from a code sharing agreement or cabotage rights. The impact of the new Seoul and Taipei two-hub airlines can be seen by comparing Scenarios I and II in Fig. 8. Overall, the impact is fairly modest. These gateways receive 19 and 7 additional transpacific flights per week respectively, while flights into Tokyo decline by 18 per week. The latter remains the dominant Asian gateway, with close to three times as many flights as Seoul and over four times as many as Taipei. The advantages deriving from Tokyo’s location and strong local market, rather than the fifth freedom privileges of U.S. airlines, thus appear to be its most important sources of comparative advantage as a transpacific gateway. Higher costs of operating through Tokyo would result from some combination of higher delay levels or increased user fees intended either to capture marginal costs and/or to recover the capital costs of new facilities. In order to incorporate such an increase in the model, it was assumed that the cost took the form of increased delay, and that the magnitude of the increased delay was sufficient to increase total terminal costs at Tokyo by either 20 or 40%. This was found to translate into an increase in terminal time of about 12 or 25 minutes. It was further assumed that this increased terminal time would be reflected in published flight schedules and that the higher operating costs resulting from the terminal time increase would be passed on to passengers through increased
227
fares. With these assumptions, the higher costs of operations through Tokyo amount to an increase the effective distance between Tokyo and all other points. This provided a convenient means of introducing the increased costs within the ALIGATER model framework. The increased costs would be expected to affect both connecting and originating traffic levels. For purposes of this analysis, we make the assumption that the impact on demand in Tokyo’s local market will be negligible. Although not entirely realistic, assuming inelastic local demand has the advantage of yielding conservative estimates of impact of the cost increase on connecting traffic levels. Any reduction in local demand, by reducing total transpacific flights to Tokyo, will amplify the effects found here. The impact of the 40% cost increase at Tokyo can be seen by comparing scenarios I and III in Figs. 8 and 9. Total flights to the United States from Tokyo decline by 29 percent. Of the 55 weekly flights diverted from Tokyo, 14 are shifted to Seoul, while Hong Kong, Taipei, Shanghai, and Osaka receive between 7 and 8 additional flights per week, and the other Asian gateways experience somewhat smaller increases. The impact on the U.S. gateways is, not surprisingly, much smaller. Nonetheless, a slight shift in service from eastern points such as Chicago and New York to the west coast and Honolulu gateways occurs. This reflects the greater predominance of services to Tokyo among the former. As noted earlier, the model assumes that true OD demand is inelastic. It is therefore obvious that the reduction in flights to Tokyo must result entirely from a reduction in the volume of connecting passengers. Indeed the number of U.S. originating passengers using Tokyo as a connecting point declines from 23 to 8 thousand per week, or 63 % . The above results can be used to estimate demand elasticities for Tokyo airport services. For transpacific flights, the cost elasticity implied by these figures is - 1.OO, and for connecting traffic the corresponding figure is -2.89. When the 20% Tokyo cost increase is used as the basis for the elasticity calculation, the results are similar: -0.96 for flights and -2.62 for connecting passengers. The demand for connecting service through Narita is thus shown to be strongly elastic with regard airport terminal costs. The demand for transpacific operations is less elastic, mainly because of the assumption that the local travel demand served by these flights is perfectly inelastic. A fourth and final scenario combined alternative gateways with high costs through Tokyo. Under this scenario, 124 transpacific flights per week go into Tokyo, a reduction from Scenario I of about one third. The number of connecting passengers using Narita under this scenario is about 73% less than under Scenario I. There also appears to be some synergy when alternative gateways and high costs are combined. Increased costs reduce the volume of connecting traffic by 67% when the alternative gateway
228
Ll. HANSEN and A.
KANAFANI
TPE
SIN
SEL
n SCENARIO I
w
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OSA
q SCENARIO IV NRT MNL HKG GUM
0
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flights under alternative
scenarios,
ORD
Asian gateways.
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229
Airline hubbing and airport economics strategy is in effect, as compared with 63% when it is not in effect. Similarly, the introduction of alternative gateways triggers a 28% drop in connecting traffic volumes through Narita when it is assumed to have higher costs, as compared with a 19% drop in the absence of a cost differential.
5. CONCLUSlONS The above analysis demonstrates that passenger demand at Narita airport deriving from transpacific hubbing-about 30% of total passenger demand in 1985 -is highly price elastic. If a 40% increase in terminal costs were passed on to these connecting passengers, and if the airlines responded to this increase in a competitive way, then well over half of this demand would be diverted to routes not involving Tokyo. A somewhat greater connecting traffic reduction- approaching 75 % -would result if the increased costs were accompanied by removal of the “bias” in the network created by U.S. airlines having more fifth freedom rights out of Tokyo than other Asian gateways. These findings raise several important issues. First, it is clear that Japanese policymakers should explicitly address the issue of whether Narita’s dominant role in the transpacific route system is desirable or sustainable. With cost sensitive demand a “do nothing” strategy would not be expected to result in nightmarish levels of congestion, but rather in a rerouting of traffic elsewhere. Similarly, plans to increase capacity financed by high user fees must be made with extreme caution, lest the higher fees eliminate the demand the new capacity is intended to serve. On the other hand, in the absence of capacity constraints or cost disadvantages, it is clear that Narita’s ideal location and strong local market would enable it to remain the dominant transpacific Asian gateway for years to come. The issue that the Japanese must face squarely is whether the costs of this dominance exceed the benefits. The analysis upon which these findings are based assumes that market forces-in the form or airline operating costs and passenger service preferences substantially shape the network. In reality, given the important roles of government in civil aviation, they will do so only with the consent of the nations involved. This will require the availability of adequate airport infrastructure without undue operating restrictions, as well as flexible bilateral agreements, throughout East Asia. More fundamental changes, such as expanded fifth freedom rights for U.S. airlines and or cabotage rights in the U.S. for foreign flag airlines, would amplify somewhat the responsiveness of the system to capacity constraints at Narita. In and of themselves, however, these latter measures would not have much impact. Notwithstanding the obvious influence of the public sector on the transpacific route system, there is a close resemblance between the actual service pattern and the ALIGATER results. This finding may
offer some comfort to those who fear that the existing system is greatly distorted as a consequence of government interference. On the other hand, comparison between the actual and predicted systems, suggests that the level of hubbing over Tokyo may be excessive. Such a conclusion must be qualified because the many uncertainties concerning model input values. Finally, although our analysis has focussed on a fairly narrow issue, our methodology has broader potential application. The impacts of new aircraft types, cost differences between different airlines, alternative bilateral agreements, and a number of other factors can be explicitly addressed in the model presented here. Further, while we have focussed the implications of alternative scenarios on airport activity levels, the analysis also yields useful information on airline performance and quality of service on a market-by-market basis. To realize more fully the utility suggested by this range of capabilities, it is necessary to moderate the simplifications concerning pricing, demand, and feeder service employed here. These are the objectives of ongoing research.
REFERENCES
Airline Business. (1988, April) Asia/Pacific: The curfew conundrum, Airline Business, 44-48. Aviation Week and Space Technology. (1989, May) Three Asian nations expand airports to relieve overburdened facilities, Aviation Week and Space Technology, 7% 71. Davies R. E. G. (1972) Airlines of the United States Since 1914. Smithsonian Institution Ellwand G. (1989, May) Sunrise
Press, Washington DC. market. Airline Business,
36-38. Ghobrial Some
A. and Kanafani A. (1985) Airline Implications for Airport Economics.
Hubbing:
Transpn. Res. 19A, 15-27. Hansen M. (1988) A Model of Airline Hub Competition. University of tation Studies Hansen M. and hubbing in a
California, Berkeley, Institute of TransporDissertation Series 88-2, Berkeley CA. Kanafani, A. (1988). International airline competitive environment, Transportation
Planning and Technology 13, 3-18. Hara N. (1989, iVay) Runways unclear, Airline Business, 41. Jane’s Information Group (1987) All the World’s Aircraft. Jane’s Information Group (1989, April-May) Fewer Handrails Mean More Space, Jane’s Airport &view, 18-20. Kasper D. (1988) Dereauiation and Globalization. Ballinaer Publishing, Cambridge, MA. Manabe S. and Sakai K. (1980) Problems in new Tokyo airport, Transportation and Development Around the Pacific. American Society of Civil Engineers, New York. Sanger D. (1989, May 18) Japan seen hedging on airline deal. New York Times, p. CI. Theil H. (1966) Applied Economic Forecasting. North-Holland, Amsterdam. United States (1953) Civil Air Transoort Aereement between the United’States of America and Japan. United
States Treaties and Other International Agreements 4, 1948-1959. United States Civil Aeronautics Board (1984) Large Aircraft Costing System. Whitaker R. (1984, August-September) Japan land, Airports International, 22-29.
runs out of
230
hf. HANSENand A. KANAFAVI APPESDIX
Airport codes East Asian Airports GUM Guam HKG Hong Kong MNL Manila NRT Tokyo OSA Osaka PEK Peking SEL Seoul SHA Shanghai SIN Singapore TPE Taipei
United States Airports HNL Honolulu IAD Washington JFK New York LAX Los Angeles ORD Chicago SEA SeattleSF0 San Francisco
AIRLINE
Institute
0191-260: 90 S3.fYJ+.LW 9 1990 Rrgamon Press plc
19%
HUBBING
of Transportation
AND AIRPORT ECONOMICS PACIFIC MARKET
MARK HANSEN and ADIB KANAFANI Studies and Department of Civil Engineering, Berkeley,CA 94720, U.S.A.
(Received 18 July 1989; in revisedform
1 November
University
IN THE
of California,
1989)
Abstract-Transpacific hubbing over Tokyo’s Narita airport, which is beset by severe capacity problems while serving a high proportion of nonlocal passengers, is explored from both a historical and an economic standpoint. Tokyo developed into Asia’s dominant transpacific gateway because it was within range of the continental U.S. for the first generation of transcontinental jets. Its dominance continued after the introduction of the B747, while a more dispersed pattern of service developed on the U.S. side of the transpacific route system. Reasons for Tokyo’s continuing dominance include its strong local market and the liberal fifth freedom rights of U.S. airlines out of Tokyo. A model of airline network competition is applied to the U.S.-Asia market. The model simulates the behavior of profit-maximizing airlines with different network types and hub locations, finding states of Cournot equilibrium. In a baseline run corresponding to the 3rd Quarter, 1985 system, the predicted transpacific network corresponds quite closely to the actual one. The impacts of demand growth, high terminal costs at Tokyo, and strengthened connectivity of alternative Asia hubs are then explored. Tokyo traffic is found to increase at a somewhat slower pace than overall demand as new non-stop services become feasible. Connecting traffic through Tokyo is found to be highly price sensitive because of the availability of alternative routings. Strengthening the connectivity of alternative Asian hubs, on the other hand, has a fairly modest effect on the distribution of traffic in the system. The results point to the need for Japan to carefully assess the costs and benefits of its role as Asia’s dominant transpacific gateway.
barriers to expansion. Since 1984, total passenger traffic between Japan and the rest of the world has increased at an annual rate of 12%, and such doubledigit growth in expected to continue into the 1990s (Ellwand, 1989). The additional traffic is composed primarily of Japanese tourists and passengers to and from other East Asian countries, for which Tokyo serves as the primary transpacific gateway. Expansion is slowed by local environmental and political opposition (Aviation Week, 1989; Hara, 1989; Manabe and Sakai, 1980) and, more fundamentally, by a severe land shortage resulting in extremely high land acquisition costs despite the large distance (66 km) between the airport and downtown Tokyo. In the face of the high social and economic costs of Japanese airport development, there is an urgent need to allocate existing capacity wisely and scrutinize new projects carefully. As a case in point, although international traffic to and from Tokyo must use Narita, it is less clear that connecting traffic must do so. Yet, comparison of total passenger volumes with origin-destination information reveals that, in the third quarter of 1985 (the only period for which the necessary data could be obtained), 55% of the passengers flying from the U.S. to Narita were on their way to elsewhere. Connecting traffic to and from the U.S. alone accounted for nearly 30% of Narita’s total passenger volume for this time period. It is only reasonable to ask whether this is an appropriate use of scarce airport resources. In this paper, we explore Tokyo’s role as a transpacific hub and the prospects for reducing that role. In
1. INTRODUCTION
Tokyo’s Narita airport, Asia’s premier transpacific gateway, has severe terminal and airside capacity problems. In 1988, 15 million passengers passed through its terminal, which was designed for 7.5 million (Jane’s Information Group, 1988; Manabe and Sakai, 1980). In response, airport authorities have been forced into a series of stop-gap measures: turning storage rooms into offices, building a temporary lounge, removing hand-rails to free extra floor space! Some airlines have resorted to accommodating connecting passengers at nearby hotels during their layovers (Jane’s Information Group, 1989). On the airside, Narita’s capacity is limited by its single runway, environmental concerns, and the conservatism of its air traffic controllers. With its daily quota set to 340 operations in the summer of 1989, Narita requires a week to handle the same volume of traffic passing through Chicago O’Hare in a day. Tight slot controls are required to meet this limit. These have forced Japan Airlines to curtail service in some markets in order to expand in others, and prevented All-Nippon Airways from having the same daily departure times for its five-day per week service to Seoul (Hara, 1989). Capacity limitations are preventing the inauguration of several newly authorized international services, and are causing Japanese reluctance to authorize new services under the U.S.Japan bilateral (Sanger, 1989). These airside and landside capacity constraints are caused by rapid demand growth and significant 217
M. HANSEN and A. KANAFAN
218
Section 2, we take a historical perspective, tracing the emergence of Tokyo as a transpacific gateway since World War II. We then shift to an economic perspective in Section 3, using a model of airline network competition to explain the structure of the existing transpacific network and Tokyo’s role in it. We use the same model prospectively in Section 4, to investigate how Tokyo’s hub traffic may respond to demand growth, cost changes, and the development of competing hubs. We summarize the conclusions of the analysis in Section 5. 2. THE
EMERGESCE OF TOKYO AS A
TRANSPACIFIC GATEWAY
Figures 1 and 2 trace the development of transpacific air service by showing the number of and gateway distribution of flights between the U.S. and Asia in the summers of 1947, 1958, 1968, 1978, and 1985. These figures reveal that substantial structural change has accompanied the system growth over these years. The emergence of Tokyo as a transpacific gateway was triggered by the development of longer range commercial aircraft in the late 1940s. Prior to this time, transpacific air traffic followed a southerly course, hopping from the U.S. terminus at San Francisco, to Hawaii, Midway Island, Wake Island, Guam, Manila, and Hong Kong. This route was considerably longer than the great circle one, which passed through Alaska, Siberia, and Japan, but the
latter required a stop in Siberia which the Soviet government refused to allow (Davies, 1972, pp. 247248).
For the northern route to be feasible, therefore, an aircraft with adequate range to overfly its Siberian portion was required. This appeared, in the form of the Douglas DC-4, in 1946. One year later, Northwest Airlines was awarded routes from Seattle and Minneapolis to Manila via Anchorage, Cold Bay, and Tokyo. With this, the development of the Tokyo as a transpacific gateway was begun. Intially, however, this development was slowed by a combination of circumstances. Although the northern route was 650 miles shorter, this advantage was offset by its stops in cold tundra1 wastelands rather than lush tropical islands. Thus, in 1947, the majority of transpacific flights continued to follow the southern route. With its locational advantage closely tied to the northern route, and the attractiveness of that route reduced by frigid stopovers, Tokyo’s role in the transpacific route system continued to be limited. By the mid-19jOs, further technical development of commercial aviation, combined with the postwar economic development of Japan and the outbreak of the Korean War, had dramatically increased transpacific services into Tokyo. With Northwest’s acquisition of the Lockheed 1049G, nonstop service from Seattle to Tokyo became possible. Meanwhile, Pan Am could now conveniently extend the southern
250
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1. Transpacific
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219
Airline hubbing and airport economics 250
q SF0 q SEA @j ORD FLTS/WK
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Fig. 2. Transpacific flights to U.S. gateways, by year.
route to Tokyo, offering non-stop service from Honolulu using the DC-7C. The Japanese economy grew at a rapid pace, its GDP more than doubling between 1950 and 1959. In response to these developments, service to Tokyo more than doubled between 1947 and 1958, while there was little or no increase in transpacific services not involving Tokyo. Tokyo’s Haneda airport, with its recently completed international terminal, could by the late 1950s justifiably claim to be the premier transpacific gateway to Asia. The introduction of jets into commercial service in the late 1950s provided an additional, powerful, stimulus for transpacific air travel, and further strengthened Tokyo’s locational advantage as a transpacific gateway. Travel time from Tokyo to Seattle was reduced from 18 to 8 hours, and unit operating costs also dropped sharply. These trends combined with rapid economic growth on both sides of the Pacific to generate a three-fold increase in transpacific air travel demand between 1959 and 1965. During this period, moreover, Tokyo was the only major Asian destination within the range of flights originating in the 48 states. The result was a quadrupling of flights between the U.S. and Japan-from 21 to 86 flights per week- between 1958 and 1968. Accompanying the increases in transpacific service into Tokyo was a comparable increase “beyond” flights between Tokyo and other Asian points. The ability of U.S. flag airlines to offer one stop and connecting service through Tokyo to other Asian points derived from a liberal bilateral agreement ne-
gotiated between the U.S. and Japan in 1952. In addition to allowing U.S. airlines-with U.S. government approval -virtually unrestricted service between the U.S. and Japan, the agreement was extremely liberal with respect to fifth freedom rights (United States, 1953). The U.S. airlines could therefore tap the local Japanese market in order to make intra-Asian flights economically viable. Consequently, the transpacific flights of U.S. airlines rarely terminated in Tokyo, but instead continued on to other East Asian destinations such as Seoul, Hong Kong, Singapore, and Bangkok. Like the connecting hubs of today, Tokyo served as an interchange point for passengers traveling to these other points. With the advent of widebody jets in the early 197Os, transpacific route development took another turn. Although market growth continued, it was mainly absorbed through larger aircraft rather than increased flights. Total service between the U.S. and Asia increased only about 25% from 1968 to 1978, but the aircraft used were mainly 350 seat 747s rather than DC-8s and 707s of about half that size. The greater range of the widebody aircraft resulted in the initiation of non-stop service to Hong Kong, Taipei, and Seoul. These new services were, however, quantitatively insignificant when compared to service to Tokyo, which in 1978 continued to be the first stop for over 80% of flights between the U.S. and Asia. Although concentration on the Asian side of the transpacific route system continued to be high, a more dispersed pattern developed on the U.S. side of
>I. HANSEX
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and
the system. In 1968, over three quarters of the flights between the U.S. and Asia departed from Honolulu, while by 1978 this share had slipped to about 55%. There are several possible causes for this divergence in development patterns on the two sides of the Pacific. First, Honolulu Iacked the 1ocaI market strength of Tokyo, and was not Iocated along the great circle route. Second, political pressures encouraged an even distribution of service among U.S. gateways. Finally, service concentration in Asia complemented service dispersion in the United States. By funneling virtually all transpacific passengers through Tokyo, it was possible to sustain transpacific links from gateways lacking sufficient passenger volumes to any one Asian destination. The last decade has witnessed some reduction in Tokyo’s dominance. Although flights between the U.S. and Tokyo more than doubled between 1978 and 1988, the proportion of transpacific flights from the U.S. stopping at Tokyo fell to about 65%. This change derives from airport capacity constraints at Narita, rapid market growth among other East Asian countries, and efforts on the part of the United States to pressure the Japanese to ease economic regulation of international aviation. The latter resulted, in the late 197Os, in a strategy of negotiating liberal bilateral agreements with other East Asian nations. It was hoped that by “encircling” Japan with liberal bilaterals, it would be pressured to moderate its policy (Kasper, 1988, pp. 82-87). This approach has had little success with Japan and often resulted in conflicts with its neighbors, but it does appear to have spurred service increases to non-Japanese destinations. Although network concentration on the Asian side of the Pacific has declined in the last decade, it continues to significantly exceed that on the North American side. Honolulu’s share of transpacific flights from the U.S. dropped from 55 to 35%. This decline reflects a rapid service expansion at established mainland gateways such as San Francisco, Los Angeles, Seattle, and Chicago. This trend has been encouraged by the increase of hubbing on the U.S. domestic network: connecting hub airports, with their strong domestic connections, are ideal consolidation points for international traffic.
3. MODELISC
THE TRANSPACIFIC ROUTE SYSTEM
The historical development of the transpacific route system offers some clues to its course of future development, but it also shows that development trends shift over time. In order to better understand how the network may evolve in the future, a computer model called ALIGATER (AirLine GAteway Traffic EstimatoR) was developed. This model explicitly includes a number of the underlying forces that shape network structure. The structure of the model is shown in Fig. 3. The inputs define a set OD markets and a set of competing airlines, each of which has a specified network type (elaborated below), predetermined gateway loca-
A. KA.L~AFANI
tion(s), as well as a set of available aircraft with specific ranges, seating capacities, and operating cost characteristics. Also specified for each airline is a set of points to which it has intracontinental feed links. The airIines included in rhe model have one of rwo types of networks, as shown in Fig. 4. The first type of network involves a single intercontinental hub which may be located in either of the two continents (in this application, North America or Asia). This type of airline has predetermined intracontinentat feed links between its hub and other North American or Asian points. It can offer transpacific service to points on the other continent. The intercontinental segments served, and the frequency of service, are determined endogenously, in a manner discussed betow. The second type of network involves two hubs, one on each of the two continents, and each with intracontinental feed links. In this type of network, only the intercontinental segment between the two gateways is served, again with a frequency that is determined endogenously. In addition to these airline specifications, the model requires as input the fare level on each intercontinental segment, the level of demand in each intercontinental market, and the great circle distances between all points. The demand data must reflect true origins and destinations rather than mere segment flows. Finally, the model requires as input the specification of a togit model of airline passenger route choice. Among the variables included in the logit model are type of routing (nonstop, one-stop, or two-stop), routing circuity, and transcontinental service frequency. The basic output of the model is a set of intercontinental service frequencies that define a state of Cournot equilibrium. In other words, the set of frequencies is such that each airline is maximizing its profit, given the frequencies of the other airlines. The profit functions used to determine the equilibrium derive from the demand, cost, and fare data and the choice model parameters. One-hub airlines derive revenue by generating local traffic on each intercontinental segment, and connecting traffic between each overseas point that is served and each point to which it has feed service from its gateway. Two-hub airlines generate revenue from three types of traffic, local nonstop between the two hubs, connecting one-stop between a hub on one continent and a nonhub the other, and two-stop service between two nonhubs. Both one and two-hub airlines incur costs from operating the transcontinental services and, in some situations, from providing the feed services. The profit is then simply the difference between the revenue generated and the costs incurred. It is easily shown that, assuming reasonable values for the choice function parameters, these functions are concave, making their maximization a straightforward matter. A cobweb algorithm-involving sequential maximization of each profit function-has been found an effective means of reaching equilibrium.
Airline hubbing and airport economics
221
lnlemational Origin-Dertmation _ Demand Table
Fares on Intercontinental Segments
lnteKi1y Distances
Passenger Route Choice Model
-
-
-
Profit Maximization Hypothesis
Courn01 Hypotherir
b
*
.
Fig. 3. Model structure.
Feeder -
(a)
One-hub
Airline
(b)
Two-hub
Airline
routes
Intercontinental
(frequency routes
exogenous) (frequency
endogcnous)
Fig. 4. One-hub and two-hub airline networks. m(A)
24:3-E
M. HANSEN and A. KANAFANI
222
The ALIGATER model drastically simplifies the situation faced by real world airlines, and is not intended to forecast their behavior in detail. Rather, it is used to explore how the basic forces of aircraft operating economics, air traveler service preferences, demand patterns, and geography shape airline networks in a competitive environment. Accordingly, we defined a set of airlines with the intention of portraying a set of generic routing possibilities rather than individual real world carriers. The set of airlines we defined included 13 one-hub and 20 two-hub airlines. These airlines are characterized in Table 1. The first 21 of the airlines listed in Table 1 are used in the initial, baseline, model run; the remainder are introduced in subsequent runs as discussed below. Each was given a single aircraft -a Boeing 747-200-for use in transpacific service. One-hub airlines were assumed to have feed available between their gateway and all other points on the same continent. Likewise, two-hub airlines were assumed to have unrestricted feed from both of their gateways. Data for estimating the choice model (a multinomial logit model) specifically for the transpacific route system were unavailable. Therefore, we estimated parameters for this application on the basis of earlier studies (Ghobrial and Kanafani, 1985; Hansen and Kanafani, 1989; Hansen, 1989). The following choice function was used:
v= - 1.0s+ ln(!--)I(S+ l)-0.003c
where V is the choice function value; S is the number of stops; F is the transcontinental service frequency (per week); C is service circuity, measured as the difference between the length of the routing and the great circle distance between the origin and destination. The first term of the choice function implies that, if two services had identical values for the other components of the function but one of the services had one more stop, the ratio of their market shares would be about 0.37 (which is lie). This reflects a strong passenger preference for fewer stops. The second term indicates that market share is a linear function of transcontinental frequency share for nonstop services, but that the dependence of market share on frequency declines with the number of stops. This weakening dependence derives from the fact that airlines coordinate feed with only selected transoceanic flights. Finally, the third term in the choice function implies that, if the circuities of two otherwise identical services differed by 500 miles, the market share of the more circuitous service would be about one-fifth that of the less circuitous one. The penalty of the added circuity arises both from the extra travel time and from the assumption that the total fare paid by the passenger is based on the length of his route. Assuming a value of time of S20 per hour, about */a of the disutility of circuity is the result of the extra fare paid.
The other main assumptions used in applying the model are summarized in Table 2. Aircraft cost data are based on Form 41 reports the U.S. DOT. A model of block hours as a function of segment length, and a set of additional costs associated with aircraft operation (for items such as landing fees and flight attendants) are based on the CAB Large Aircraft Costing System (U.S. Civil Aeronautics Board, 1984). The range value was obtained from Jane’s All the World’s Aircraft, and the capacity value is based on average available seats per aircraft on Pacific routes computed from data published by ICAO. The segment revenue, estimated at 0.07 per statute mile, represents the net revenue after subtracting traffic-related expenses such as food, baggage handling, and ticketing. Data concerning these expenses were also obtained from the Large Aircraft Costing System. The maximum load factor of 75% was derived from ICAO reports for the Pacific for the third quarter of 1985. Without the maximum load factor constraint, the passenger volume attracted could exceed the seating capacity provided by a given service. Seventy-five percent is intended to represent the load factor at which a typical airline would consider adding capacity in the absence of fleet limitations or regulatory constraints, not as an absolute upper limit. Lastly, the minimum service frequency of three flights per week reflects the minimum frequency observed in transpacific markets in 1985. Cost and marketing considerations not explicitly represented in the model are assumed to make lovver frequency levels economically unfeasible. A major difficulty in the analysis of international aviation issues is the lack of true OD data. ICAO publishes international flight stage traffic data, and the United States Immigration and Naturalization Service (INS) publishes data on passenger flows between U.S. and foreign gateways. Neither of these sources can be used to establish the ultimate origin and destination of passenger traffic, however. It was therefore necessary to combine ICAO and INS data, data from the U.S. domestic origin and destination survey, and a number of simplifying assumptions to arrive at an estimated true OD table. Details of this estimation procedure will not be discussed here, but can be obtained from the authors upon request. There is an urgent need for better sources of true OD data to support future research in international civil aviation. The base run produced an approximate equilibrium state by the fifth round of frequency optimization. The largest frequency change in this round was l.l%, and the vast majority of frequency values changed less than 0.1% Table 3 summarizes the operations of each airline at the end of round 5. Either the minimum frequency constraint or the maximum load factor constraint is binding on all service frequencies. The minimum frequency requirement is binding on 10 of the 34 services offered. Such low frequencies are less common in the actual system. The discrepancy derives from the fact that, although three flights per week is rea-
Airline hubbing and airport economics
223
Table 1. Airlines used in simulations Airline
U.S. Hub
Asian Hub
Scenarios
Feed
None None
B747-200 B747-200 B747-200 B747-200 B747-200 B747-200
To all To all To all To all To all To all
U.S. U.S. U.S. U.S. U.S. U.S.
points points points points points points
All All Ail All All All
Bangkok Hong Kong Seoul Shanghei Singapore Taipei Tokyo
B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200
To all Asia To all Asia To all Asia To all Asia To all Asia To all Asia To all Asia
points points points points points points points
All All All All All All All
Chicago Honolulu Honolulu Los Angeles New York San Francisco San Francisco Seattle
Tokyo Guam Tokyo Tokyo Tokyo Tokyo Tokyo
B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200
To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia,
U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S.
points points points points points points points points
All All All All All All All All
Chicago Chicago Honolulu Honolulu Los Angeles Los Angeles New York New York San Francisco San Francisco Seattle Seattle
Seoul Taipei Seoul Taipei Seoul Taipei Seoul Taipei Seoul Taipei Seoul Taipei
B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200 B747-200
To all Asia, To all Asia, To all Asia, To all Asia, To all Asia. To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia, To all Asia,
U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S.
points points points points noints boints points points points points points points
II. IV II, IV II, IV II, IV II, IV II, IV II, IV II, IV 11, IV II, IV II, IV II, IV
Chicago Honolulu Los Angeles New York San Francisco Seattle
None
7 8 9 10 11 12 13
None None None None None
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33
1
2 3 4 5 6
Aircraft
None
None
Hong Kong
sonable as an absolute minimum level of service, airlines display a strong preference for more frequent service because of the supposed marketing advantages it offers. In the cases where the maximum load factor constraint is binding, the level of competition is not strong enough to induce airlines to offer more flights at reduced load factors. This suggests that, although many airlines participate in the transpacific market, exposure to competition is substantially lessened by differences in the airlines’ service rights and access to feed traffic. Comparisons of the model results with observed transpacific service frequencies are summarized in Figs. 5 and 6. The predictive accuracy of the model is Table 2. Model input values Input Variable Aircraft Operating Cost (per departure) Aircraft Operating Cost (per aircraft-mile) Aircraft Range (statute miles) Aircraft Seating Capacity Maximum Load Factor Minimum Service Frequency (flights per week) Net Revenue (per passenger-mile)
Value $13200 512.43 7500 350 15% 3 SO.07
good in light of its simplicity and the dubious reliability of the OD data. The model forecasts a total of 234 weekly flights from the U.S. (excluding Alaska) to East Asia, whereas in the actual number of flights was 236. The correlation between predicted and actual frequencies on transpacific segments, plotted in Figure 5, is 0.90. When total transpacific operations for U.S. and Asian gateways are compared (Fig. 6), agreement is somewhat better, with correlations just under 0.99 in both cases. The Theil inequality coefficients (Theil, 1966) are 0.17 for individual segments, 0.085 for Asian gateways, and 0.047 for U.S. gateways. The covariance components predominate with the exception of the Asian gateways, where the contributions of the variance and covariance components are roughly equal. The Asian gateway results reflect a disparity between forecast and actual level of flights into Tokyo. Whereas the model predicts 133 weekly flights from the U.S. to Tokyo, the observed number is 151. This underprediction for Tokyo is offset by overpredictions of weekly flights to Guam (13 predicted, 5 actual), Seoul (29 predicted, 22 actual), Shanghai (4 predicted, 0 actual), and Singapore (4 predicted, 0 actual). Assuming that these discrepancies do not derive from erroneous demand data or inaccurate mod-
M. H~VSEN and A.
224
Table 3. Summary Airline No. 1 2 2 2 2 3 3 3 4 5 5 5 5 5 6 6 6 7 8 9 9 9 9 9 9 9 10 10 II 12 12 I2 12 13 13 13 13 13 14 14 I5 15 16 16 17 17 18 18 19 19 20 20 21 21
or airline operations, Flights/ Week
Segment SYSTEM Honolulu Honolulu Honolulu SYSTEiM Los Angeles Los Angeles SYSTEXI SYSTEM San Francisco San Francisco San Francisco SYSTEM San Francisco Seattle SYSTEM Seattle SYSTElM SYSTEM Washington DC Los Angeles San Francisco Honolulu Chicago New York SYSTEM SYSTEIM New York SYSTEM Honolulu Los Angeles San Francisco SYSTEM New York San Francisco Los Angeles Honolulu SYSTEbl Chicago SYSTEM Honolulu SYSTEM Honolulu SYSTEM Los Angeles SYSTE,M New York SYSTEM San Francisco SYSTEM San Francisco SYSTEM Seattle SYSTE&l
Manila Singapore Osaka Taipei Hong Kong
Bejing Hong Kong Taipei Guam
Hong Kong Seoul Seoul Seoul Seoul Seoul Seoul Seoul Shanghai Taipei Taipei Taipei Tokyo Tokyo Tokyo Tokyo Tokyo Guam Tokyo Tokyo Tokyo Hong Kong Tokyo Tokyo
el parameters, they suggest an excessive level of transpacific hubbing over Tokyo in 1985, resulting in fewer-than-expected flights to some alternative gateways and a lack of non-stop service altogether to others. 4. MODELISG THE TRANSPACIFIC SYSTEM-FUTURE
KA.AFANI
ROUTE
SCENARIOS
Although ALIGATER’s prediction of the 1985 network was not fully accurate, we considered it close
baseline
Revenue
equilibrium
cost
Load Factor (%)
Profit
0
0
0
0
0.0
7 4 6 17 3 3 6 0 3 3 3 13 4 5 9 4 0 0 3 6 3 4 3 5 24 4 4 0 6 4 3 13 3 4 10 21 38 8 8 0 0 23 23 18 18 10 10 5 5 7 7 10 19
647059 434208 475251 1556525 319549 371678 691227 0 317601 336819 347206 1413327 411700 612231 976590 364358 0 0 379048 701612 278053 358015 302885 677186 2696799 522841 52284 I 0 600698 524556 311002 1436257 369118 403939 950419 1432938 3156414 959777 959777 662994 662994 1603918 1603918 1794630 1794630 1269301 1269301 581431 581431 1620662 1620662 1647875 1647875
525249 340213 404608 1270070 293023 309617 602640 0 259797 297199 2807 17 1166827 329113 481790 778990 297200 0 0 298691 558746 249617 298834 283029 528628 2217546 404610 404610 0 491414 410140 280717 1182271 290748 330290 76882 1 1246083 2635942 758527 758527 573590 573590 1387553 1387553 1451339 1451339 994970 994970 453452 453452 1324542 1324542 1364707 1364707
121810 93995 70650 286455 26526 62061 88587 0 57804 39620 66489 246500 82587 13044 1 197600 67158 0 0 80357 142866 28435 59181 19856 148558 479253 118231 118231 0 109284 114416 30285 253985 78369 73650 181598 186855 520473 201251 201251 89404 89404 216364 216364 343290 343290 27433 1 27433 1 127978 127978 296120 296120 283169 283169
75.0
75.0 75.0 75.0 63.9 69.8 66.9 0.0 73.2 66.3 73.0 72.1 75.0 75.0 75.0 75.0 0.0 0.0 74.3 75.0 67.2 74.9 63.1 75.0 72.5 75.0 75.0 0.0 74.9 75.0 65.4 72.9 74.6 75.0 75.0 71.6 74.7 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0
enough to justify its use in exploring future possibilities for network development and their implications for hubbing over Tokyo. We examined four scenarios designed to explore how demand growth, increased congestion costs, and the formation of hubs at other points in Asia would affect network development in general, and activity at Tokyo in particular. Table 4 summarizes the four scenarios and compares them to the baseline run discussed above. The first scenario involved a uniform 50% increase in demand. It was initialized with the equilibri-
Airline hubbing
and airport
225
economics
25 ACTUAL (FLTS/wK)
0
5
15
10
20
MODEL Fig. 5. Model vs. actual transpacific
25
30
35
(FLTS/WK) flights,
by segment.
WAS SF0 SEA ORD LAX HNL JFK TPE GATEWAY
SIN
I
SHA SEL PEK OSA NRT MNL HKG GUM 0
20
40
60
60 100120140160
FLTS/WK Fig. 6. Model vs. actual transpacific
flights,
by gateway.
40
45
M. HAMEN and A. KAKAFAXI
226 Table 4. Scenario descriptions Scenario
Demand
Narita Costs
Airlines*
Baseline I II III
3rd Q, 1985 50% over Baseline 50% over Baseline 50% over Baseline
1-21 I-21 l-33 1-21
IV
50% over Baseline
Normal Normal Normal 40% over Normal 20% over Normal 40% over Normal
1-33
*For description of airlines, see Table 1. urn frequencies from the base scenario. In the fifth round of optimization, the maximum frequency change was 1.7%, indicating that an approximate new equilibrium state had been established. In the new equilibrium state, there are 349 flights per week between the U.S. and Asia, an increase of just under 50%. The flight increase is slightly less than the demand increase because fewer services were constrained by the minimum frequency constraint under the demand growth scenario. Although the demand growth is assumed to be uniform, its impact on flight frequencies is not. Total transpacific flight growth from the Asian gateways and U.S. gateways resulting from the increased demand is summarized in Fig. 7. For Asian gateways, there is a fairly consistent pattern in which the gateways with the lowest numbers of flights in the baseline have the highest percentage increases in flights.
This trend results from new routes becoming feasible as demand increases, and from the disparities in the sensitivity of service attractiveness to transpacific flight frequency among the different service types. The overall impact of these phenomena is to divert some connecting traffic away from the major Asian gateways-especially Tokyo - and increase flights into cities such as Hong Kong, Taipei, and Manilla. The only cases where this effect is not seen are those in which the minimum frequency constraint was initially binding, resulting in extra capacity which absorbs some of the demand increase before additional flights are required. Unlike the Asian gateways, the U.S. ones exhibit no clear relationship between percentage flight growth and the baseline number of flights. In this case the dispersive impacts of demand growth found for the Asian gateways are counteracted by the opening of new nonstop routes. For example, the dispersive effect causes Honolulu to have only a 42% increase in flights to Tokyo, but at the same time it receives new nonstop service to Hong Kong and a second airline offering service to Singapore. The net result is an increase in transpacific flights of almost exactly 50%. The difference in impact of demand growth on service distribution derives from the differences in the degree of concentration noted earlier. With the baseline network so strongly focussed on the Tokyo
150%
125%
100%
FLIGHT INCREASE
u m U.S.
75%
0 ASIA
50%
25%
0
20
40
60
BASELINE
60
100
120
140
FLIGHTS
Fig. 7. Impact of 50% demand growth on gateway flights.
Airline hubbing and airport economics gateway, the loss of connecting traffic through Narita is more important than any gains arising from the opening of new nonstop segments. For all other transpacific gateways-on both sides of the Pacifictraffic growth from new services either counteracts or dominates the loss of connecting passengers. Although demand growth results in a less-thanproportional increase in transpacific traffic hubbing through Tokyo, this is unlikely to significantly alleviate the capacity shortage there. The ALIGATER model was therefore used to explore ways of further shifting of connecting traffic from Narita to other points in the system. Two specific possibilities were considered. One is to encourage transpacific traffic to connect through alternative Asian gateways by establishing two-hub airlines at these gateways. The second approach entails raising the terminal costs associated with operations in and out of Narita. In the alternative routing approach, Scenario II, 12 two-gateway airlines numbered 22-33 are added. Six of these airlines have their Asian gateway at Seoul, and six at Taipei. Both the Seoul group and the Taipei group consist of carriers with U.S. gateways at Honolulu, Chicago, Los Angeles, New York, Seattle, and San Francisco. These groups are completely analogous to the six Narita-based two-gateway airlines included in the baseline and growth scenarios. In the real world, they could reflect either expanded use of fifth freedom rights out of Seoul and Taipei by U.S. airlines, or strengthened U.S. feed for Korean or Taiwanese airlines, perhaps from a code sharing agreement or cabotage rights. The impact of the new Seoul and Taipei two-hub airlines can be seen by comparing Scenarios I and II in Fig. 8. Overall, the impact is fairly modest. These gateways receive 19 and 7 additional transpacific flights per week respectively, while flights into Tokyo decline by 18 per week. The latter remains the dominant Asian gateway, with close to three times as many flights as Seoul and over four times as many as Taipei. The advantages deriving from Tokyo’s location and strong local market, rather than the fifth freedom privileges of U.S. airlines, thus appear to be its most important sources of comparative advantage as a transpacific gateway. Higher costs of operating through Tokyo would result from some combination of higher delay levels or increased user fees intended either to capture marginal costs and/or to recover the capital costs of new facilities. In order to incorporate such an increase in the model, it was assumed that the cost took the form of increased delay, and that the magnitude of the increased delay was sufficient to increase total terminal costs at Tokyo by either 20 or 40%. This was found to translate into an increase in terminal time of about 12 or 25 minutes. It was further assumed that this increased terminal time would be reflected in published flight schedules and that the higher operating costs resulting from the terminal time increase would be passed on to passengers through increased
227
fares. With these assumptions, the higher costs of operations through Tokyo amount to an increase the effective distance between Tokyo and all other points. This provided a convenient means of introducing the increased costs within the ALIGATER model framework. The increased costs would be expected to affect both connecting and originating traffic levels. For purposes of this analysis, we make the assumption that the impact on demand in Tokyo’s local market will be negligible. Although not entirely realistic, assuming inelastic local demand has the advantage of yielding conservative estimates of impact of the cost increase on connecting traffic levels. Any reduction in local demand, by reducing total transpacific flights to Tokyo, will amplify the effects found here. The impact of the 40% cost increase at Tokyo can be seen by comparing scenarios I and III in Figs. 8 and 9. Total flights to the United States from Tokyo decline by 29 percent. Of the 55 weekly flights diverted from Tokyo, 14 are shifted to Seoul, while Hong Kong, Taipei, Shanghai, and Osaka receive between 7 and 8 additional flights per week, and the other Asian gateways experience somewhat smaller increases. The impact on the U.S. gateways is, not surprisingly, much smaller. Nonetheless, a slight shift in service from eastern points such as Chicago and New York to the west coast and Honolulu gateways occurs. This reflects the greater predominance of services to Tokyo among the former. As noted earlier, the model assumes that true OD demand is inelastic. It is therefore obvious that the reduction in flights to Tokyo must result entirely from a reduction in the volume of connecting passengers. Indeed the number of U.S. originating passengers using Tokyo as a connecting point declines from 23 to 8 thousand per week, or 63 % . The above results can be used to estimate demand elasticities for Tokyo airport services. For transpacific flights, the cost elasticity implied by these figures is - 1.OO, and for connecting traffic the corresponding figure is -2.89. When the 20% Tokyo cost increase is used as the basis for the elasticity calculation, the results are similar: -0.96 for flights and -2.62 for connecting passengers. The demand for connecting service through Narita is thus shown to be strongly elastic with regard airport terminal costs. The demand for transpacific operations is less elastic, mainly because of the assumption that the local travel demand served by these flights is perfectly inelastic. A fourth and final scenario combined alternative gateways with high costs through Tokyo. Under this scenario, 124 transpacific flights per week go into Tokyo, a reduction from Scenario I of about one third. The number of connecting passengers using Narita under this scenario is about 73% less than under Scenario I. There also appears to be some synergy when alternative gateways and high costs are combined. Increased costs reduce the volume of connecting traffic by 67% when the alternative gateway
228
Ll. HANSEN and A.
KANAFANI
TPE
SIN
SEL
n SCENARIO I
w
PEK
0 SCENARIO II
GATEWAY
n SCENARIO Ill
OSA
q SCENARIO IV NRT MNL HKG GUM
0
50
100
150
200
FLTS/WK Fig. 8. Weekly transpacific
flights under alternative
scenarios,
ORD
Asian gateways.
n SCENARIO I 0 SCENARIO II
GATEWAY LAX
n SCENARIO Ill q SCENARIO IV
JFK
HNL
0
20
40
60
a0
10
12
14
0
0
0
FLTS/WK Fig. 9. Weekly transpacific
flights under alternative
scenarios,
U.S. gateways.
229
Airline hubbing and airport economics strategy is in effect, as compared with 63% when it is not in effect. Similarly, the introduction of alternative gateways triggers a 28% drop in connecting traffic volumes through Narita when it is assumed to have higher costs, as compared with a 19% drop in the absence of a cost differential.
5. CONCLUSlONS The above analysis demonstrates that passenger demand at Narita airport deriving from transpacific hubbing-about 30% of total passenger demand in 1985 -is highly price elastic. If a 40% increase in terminal costs were passed on to these connecting passengers, and if the airlines responded to this increase in a competitive way, then well over half of this demand would be diverted to routes not involving Tokyo. A somewhat greater connecting traffic reduction- approaching 75 % -would result if the increased costs were accompanied by removal of the “bias” in the network created by U.S. airlines having more fifth freedom rights out of Tokyo than other Asian gateways. These findings raise several important issues. First, it is clear that Japanese policymakers should explicitly address the issue of whether Narita’s dominant role in the transpacific route system is desirable or sustainable. With cost sensitive demand a “do nothing” strategy would not be expected to result in nightmarish levels of congestion, but rather in a rerouting of traffic elsewhere. Similarly, plans to increase capacity financed by high user fees must be made with extreme caution, lest the higher fees eliminate the demand the new capacity is intended to serve. On the other hand, in the absence of capacity constraints or cost disadvantages, it is clear that Narita’s ideal location and strong local market would enable it to remain the dominant transpacific Asian gateway for years to come. The issue that the Japanese must face squarely is whether the costs of this dominance exceed the benefits. The analysis upon which these findings are based assumes that market forces-in the form or airline operating costs and passenger service preferences substantially shape the network. In reality, given the important roles of government in civil aviation, they will do so only with the consent of the nations involved. This will require the availability of adequate airport infrastructure without undue operating restrictions, as well as flexible bilateral agreements, throughout East Asia. More fundamental changes, such as expanded fifth freedom rights for U.S. airlines and or cabotage rights in the U.S. for foreign flag airlines, would amplify somewhat the responsiveness of the system to capacity constraints at Narita. In and of themselves, however, these latter measures would not have much impact. Notwithstanding the obvious influence of the public sector on the transpacific route system, there is a close resemblance between the actual service pattern and the ALIGATER results. This finding may
offer some comfort to those who fear that the existing system is greatly distorted as a consequence of government interference. On the other hand, comparison between the actual and predicted systems, suggests that the level of hubbing over Tokyo may be excessive. Such a conclusion must be qualified because the many uncertainties concerning model input values. Finally, although our analysis has focussed on a fairly narrow issue, our methodology has broader potential application. The impacts of new aircraft types, cost differences between different airlines, alternative bilateral agreements, and a number of other factors can be explicitly addressed in the model presented here. Further, while we have focussed the implications of alternative scenarios on airport activity levels, the analysis also yields useful information on airline performance and quality of service on a market-by-market basis. To realize more fully the utility suggested by this range of capabilities, it is necessary to moderate the simplifications concerning pricing, demand, and feeder service employed here. These are the objectives of ongoing research.
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Airline Business. (1988, April) Asia/Pacific: The curfew conundrum, Airline Business, 44-48. Aviation Week and Space Technology. (1989, May) Three Asian nations expand airports to relieve overburdened facilities, Aviation Week and Space Technology, 7% 71. Davies R. E. G. (1972) Airlines of the United States Since 1914. Smithsonian Institution Ellwand G. (1989, May) Sunrise
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Transpn. Res. 19A, 15-27. Hansen M. (1988) A Model of Airline Hub Competition. University of tation Studies Hansen M. and hubbing in a
California, Berkeley, Institute of TransporDissertation Series 88-2, Berkeley CA. Kanafani, A. (1988). International airline competitive environment, Transportation
Planning and Technology 13, 3-18. Hara N. (1989, iVay) Runways unclear, Airline Business, 41. Jane’s Information Group (1987) All the World’s Aircraft. Jane’s Information Group (1989, April-May) Fewer Handrails Mean More Space, Jane’s Airport &view, 18-20. Kasper D. (1988) Dereauiation and Globalization. Ballinaer Publishing, Cambridge, MA. Manabe S. and Sakai K. (1980) Problems in new Tokyo airport, Transportation and Development Around the Pacific. American Society of Civil Engineers, New York. Sanger D. (1989, May 18) Japan seen hedging on airline deal. New York Times, p. CI. Theil H. (1966) Applied Economic Forecasting. North-Holland, Amsterdam. United States (1953) Civil Air Transoort Aereement between the United’States of America and Japan. United
States Treaties and Other International Agreements 4, 1948-1959. United States Civil Aeronautics Board (1984) Large Aircraft Costing System. Whitaker R. (1984, August-September) Japan land, Airports International, 22-29.
runs out of
230
hf. HANSENand A. KANAFAVI APPESDIX
Airport codes East Asian Airports GUM Guam HKG Hong Kong MNL Manila NRT Tokyo OSA Osaka PEK Peking SEL Seoul SHA Shanghai SIN Singapore TPE Taipei
United States Airports HNL Honolulu IAD Washington JFK New York LAX Los Angeles ORD Chicago SEA SeattleSF0 San Francisco