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Bundling, integration and the delivered price of air travel: are low cost carriers full service competitors?

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  • Gillen, David
  • Morrison, William

Abstract

We explore the interaction between full service carriers (FSCs) and low cost carriers (LCCs) in a market for air travel, of which flying is merely one component in a bundle of services. The paper employs a locational approach to product differentiation to provide insights concerning the degree to which LCCs compete with FSCs. This approach highlights the role of airports in both geographic location relative to the travel market and as independent business entities that generate both airside and groundside revenues. A simple address model is used to illustrate conditions under which LCCs (affiliated with subsidiary airports) only constitute partial competition for FSCs. Consequently, market interactions between FSCs and LCCs can exhibit price stability and relatively low price dispersion. The model also indicates that vertical relationships between airports and airlines can be both profit enhancing and socially desirable.

Suggested Citation

  • Gillen, David & Morrison, William, 2003. "Bundling, integration and the delivered price of air travel: are low cost carriers full service competitors?," Journal of Air Transport Management, Elsevier, vol. 9(1), pages 15-23.
  • Handle: RePEc:eee:jaitra:v:9:y:2003:i:1:p:15-23
    DOI: 10.1016/S0969-6997(02)00071-6
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    References listed on IDEAS

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    1. Curtis Eaton, B. & Lipsey, Richard G., 1989. "Product differentiation," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 12, pages 723-768 Elsevier.
    2. Pels, Eric & Nijkamp, Peter & Rietveld, Piet, 1997. "Substitution and complementarity in aviation: airports vs airlines," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 33(4), pages 275-286, December.
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    Cited by:

    1. Barbot, Cristina & D’Alfonso, Tiziana & Malighetti, Paolo & Redondi, Renato, 2013. "Vertical collusion between airports and airlines: An empirical test for the European case," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 57(C), pages 3-15.
    2. Albers, Sascha & Heuermann, Caroline & Koch, Benjamin, 2009. "International market entry strategies of EU and Asia-Pacific low fare airlines," Working Paper Series 106, University of Cologne, Department of Business Policy and Logistics.
    3. De Borger, Bruno & Van Dender, Kurt, 2006. "Prices, capacities and service levels in a congestible Bertrand duopoly," Journal of Urban Economics, Elsevier, vol. 60(2), pages 264-283, September.
    4. Diaconu Maxim Laura, 2012. "The Development of the Low-Cost Carriers’ Business Models. Southwest Airlines Case Study," Scientific Annals of Economics and Business, De Gruyter Open, vol. 59(1), pages 231-238, July.
    5. Eugeni Aguiló & Belen Rey & Jaume Rosselló & Catalina M. Torres, 2007. "The Impact of the Post-Liberalisation Growth of LCCs on the Tourism Trends in Spain," Rivista di Politica Economica, SIPI Spa, vol. 97(1), pages 39-60, January-F.
    6. Yetiskul, Emine & Matsushima, Kakuya & Kobayashi, Kiyoshi, 2005. "Airline Network Structure with Thick Market Externality," Research in Transportation Economics, Elsevier, vol. 13(1), pages 143-163, January.
    7. Homsombat, Winai & Lei, Zheng & Fu, Xiaowen, 2014. "Competitive effects of the airlines-within-airlines strategy – Pricing and route entry patterns," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 63(C), pages 1-16.
    8. Arjomandi, Amir & Seufert, Juergen Heinz, 2014. "An evaluation of the world's major airlines' technical and environmental performance," Economic Modelling, Elsevier, vol. 41(C), pages 133-144.
    9. Barbot, Cristina & D'Alfonso, Tiziana, 2014. "Why do contracts between airlines and airports fail?," Research in Transportation Economics, Elsevier, vol. 45(C), pages 34-41.
    10. repec:eee:touman:v:31:y:2010:i:1:p:36-44 is not listed on IDEAS
    11. Dapeng Zhang & Xiaokun Wang, 2016. "Investigating the Dynamic Spillover Effects of Low-Cost Airlines on Airport Airfare Through Spatio-Temporal Regression Models," Networks and Spatial Economics, Springer, vol. 16(3), pages 821-836, September.
    12. Seo, Kwanglim & Moon, Joonho & Lee, Seoki, 2015. "Synergy of corporate social responsibility and service quality for airlines: The moderating role of carrier type," Journal of Air Transport Management, Elsevier, vol. 47(C), pages 126-134.
    13. Fröhlich, Karsten & Niemeier, Hans-Martin, 2011. "The importance of spatial economics for assessing airport competition," Journal of Air Transport Management, Elsevier, vol. 17(1), pages 44-48.
    14. Basso, Leonardo J. & Zhang, Anming, 2007. "Congestible facility rivalry in vertical structures," Journal of Urban Economics, Elsevier, vol. 61(2), pages 218-237, March.
    15. Zhang, Anming & Fu, Xiaowen & Yang, Hangjun (Gavin), 2010. "Revenue sharing with multiple airlines and airports," Transportation Research Part B: Methodological, Elsevier, vol. 44(8-9), pages 944-959, September.
    16. Daft, Jost & Albers, Sascha, 2012. "A profitability analysis of low-cost long-haul flight operations," Journal of Air Transport Management, Elsevier, vol. 19(C), pages 49-54.
    17. Jorge Valido & M. Pilar Socorro & Francesca Medda, 2013. "DYPES: Vertical differentiation, schedule delay and entry deterrence: Low cost vs. full service airlines," Working Papers 2013-05, FEDEA.
    18. Gillen, David & Morrison, William G., 2005. "Regulation, competition and network evolution in aviation," Journal of Air Transport Management, Elsevier, vol. 11(3), pages 161-174.
    19. Albers, Sascha & Heuermann, Caroline & Koch, Benjamin, 2010. "Internationalization strategies of EU and Asia–Pacific low fare airlines," Journal of Air Transport Management, Elsevier, vol. 16(5), pages 244-250.
    20. Warnock-Smith, David & Potter, Andrew, 2005. "An exploratory study into airport choice factors for European low-cost airlines," Journal of Air Transport Management, Elsevier, vol. 11(6), pages 388-392.
    21. Budd, Lucy & Francis, Graham & Humphreys, Ian & Ison, Stephen, 2014. "Grounded: Characterising the market exit of European low cost airlines," Journal of Air Transport Management, Elsevier, vol. 34(C), pages 78-85.

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