Economies of Density, Network Size and Spatial Scope in the European Airline Industry

In this article we use four different indices to measure cost performance of the European Airline Industry. By using the number of routes as an indicator of Network Size, we are able to estimate indicators of Economies of Density, Network Size and Spatial Scope. By estimating total and variable cost functions we are also able to calculate an index of the excess capacity of the firms. For this purpose, we use data from the years 1984 to 1998, a period during which several deregulation measures were imposed on the European airline industry. Some of the implications of this deregulation process for the cost performance of the industry are presented and discussed. Our results suggest that in the year 1998, almost all the firms had Economics of Density in their existing networks, while several of the firms also had Economies of Network Size and Economies of Spatial Scope. All of the firms had excess capacity of fixed inputs. These results support our hypothesis that fusion, alliance, and merger strategies followed by the principal European airlines after 1998 are not just explained by marketing strategies, but also by the cost structure of the industry.