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Does the theory of the ‘core’ explain why airlines fail to cover their long-run costs of capital?

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  • Button, Kenneth

Abstract

The major air transport markets at the early part of the 21st century are failing to generate sufficient revenues to cover their long-run costs. Many airline are being supported by subsidies, going out of business (e.g. Sabena, Ansett, Canadian International, Swissair) or having to resort to various forms of financial restructuring such as afforded by Chapter 11 bankruptcy laws in the US (US Airways, Midway, National). The effects of the terrorist attacks of September 2001 have exacerbated this situation, but the data suggests the problem be more deep routed in the ‘deregulated’ markets that now exist in many parts of the world. This paper concerns itself with the issue of whether there are intrinsic features of the scheduled network airline industry that makes the current structure of liberalized markets unsustainable. It highlights on a number of features of this market but pays particular attention to the question of whether the market is naturally prone to excesses in competition that, because of its nature, forces airline fares down to the level where full costs cannot be recovered. It focuses in this sense on a long established concept in economics, namely does a core exist in this market. The fact that there is prima face evidence to suggest that the core is empty then leads to a discussion of appropriate policy reactions that may allow a more sustainable market structure to survive.

Suggested Citation

  • Button, Kenneth, 2003. "Does the theory of the ‘core’ explain why airlines fail to cover their long-run costs of capital?," Journal of Air Transport Management, Elsevier, vol. 9(1), pages 5-14.
  • Handle: RePEc:eee:jaitra:v:9:y:2003:i:1:p:5-14
    DOI: 10.1016/S0969-6997(02)00075-3
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    References listed on IDEAS

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    Cited by:

    1. Yang, Dong & Liu, Miaojia & Shi, Xiaoning, 2011. "Verifying liner Shipping Alliance’s stability by applying core theory," Research in Transportation Economics, Elsevier, vol. 32(1), pages 15-24.
    2. Fageda, Xavier & Suau-Sanchez, Pere & Mason, Keith J., 2015. "The evolving low-cost business model: Network implications of fare bundling and connecting flights in Europe," Journal of Air Transport Management, Elsevier, vol. 42(C), pages 289-296.
    3. Akbar, Yusaf & Németh, Adél & Niemeier, Hans-Martin, 2014. "Here we go again…the Permanently Failing Organization: An application to the airline industry in Eastern Europe," Journal of Air Transport Management, Elsevier, vol. 35(C), pages 1-11.
    4. Ginieis, Matías & Sánchez-Rebull, María-Victoria & Campa-Planas, Fernando, 2012. "The academic journal literature on air transport: Analysis using systematic literature review methodology," Journal of Air Transport Management, Elsevier, vol. 19(C), pages 31-35.
    5. Spychalski, John C. & Swan, Peter F., 2004. "US rail freight performance under downsized regulation," Utilities Policy, Elsevier, vol. 12(3), pages 165-179, September.
    6. Wojahn, Oliver W., 2012. "Why does the airline industry over-invest?," Journal of Air Transport Management, Elsevier, vol. 19(C), pages 1-8.
    7. Fabio Domanico, 2007. "The European airline industry: law and economics of low cost carriers," European Journal of Law and Economics, Springer, vol. 23(3), pages 199-221, June.
    8. Reis, Vasco & Silva, João, 2016. "Assessing the air cargo business models of combination airlines," Journal of Air Transport Management, Elsevier, vol. 57(C), pages 250-259.
    9. Chiuling Lu & Ann Yang & Jui-Feng Huang, 2015. "Bankruptcy predictions for U.S. air carrier operations: a study of financial data," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 574-589, July.
    10. Tretheway, Mike, 2011. "Comment on “legacy carriers fight backâ€," Journal of Air Transport Management, Elsevier, vol. 17(1), pages 40-43.
    11. Morrison, William G., 2004. "Dimensions of predatory pricing in air travel markets," Journal of Air Transport Management, Elsevier, vol. 10(1), pages 87-95.

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