Price Competition in the Top US Domestic Markets: Revenues and Yield Premium Nikolas Pyrgiotis Dr P. Belobaba
Objectives Perform an analysis of US Domestic markets from years 2000 to 2006 in order to: Realize the yield differential between Legacy Airlines and Low Cost Carriers. Yield is the revenue generated by one passenger carried one mile. Identify trends in traffic, revenues, average fare. Get an overview of the competition each legacy carrier faces and how this has changed from 2000 to 2006. Identify differences in yield premium, revenues, traffic and market share for each Legacy Carrier in its Hub Markets 2
Data Sample 10% sample of tickets of all US airlines which operate a/c with capacity greater than 60 seats Data source: O&D Plus US DOT Data Base Products O&D Plus Summary of all domestic O-D markets by carrier by quarter Top 1000 US domestic markets extracted from O&D Plus for the period 2000-06 Database: 856 OD markets that appeared every year in the Top 1000 markets Traffic, Revenues, Yield, Market Share, Average Haul Within each market airlines with market share below 5% are excluded from the database 3
Changes in Overall Traffic and Revenue Total PDEW Traffic and Revenue in Top 856 Markets Thousands 440 420 400 $70 $60 $50 Millions 380 360 340 $40 $30 $20 $10 Traffic Revenues 320 $0 4
Legacy Carriers vs LCCs Two distinct groups of airlines: LCCs were selected according to their traffic during 2005 in the Top 856 Markets; i.e. the six with the highest traffic (and revenues) in 2006. Legacy Group American Airlines Continental Airlines Delta Air Lines Northwest Airlines United Airlines US Airways LCC Group Airtran/Frontier America West Airlines Frontier Airlines Jet Blue Southwest Airlines Spirit Air Lines 5
Legacy Group vs LCC Group PDEW Traffic in Top 856 Markets Thousands 250 200 150 100 Average Fare in Top 856 Markets 50 $200 $180 0 Legacy Group LCC Group PDEW Revenues in Top 856 Markets $160 $140 $120 $100 $90.44 $54.67 Millions $45 $40 $80 $60 $35 $40 $30 $25 $20 $- $20 $15 Legacy Group LCC Group $10 $5 $- Legacy Group LCC Group 6
Effective Competitors Effective Competitors in the Top 856 Markets in 2000 and 2006: Average Number of Competitors per market Excluding airlines with Market Share below 5% 40% 35% Change in Competition from 2000 to 2006 % of Sample Markets 30% 25% 20% 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 No of Competitors 2000 2006 Effective Competitors drop from 3.18 in 2000 to 2.95 in 2006 More Monopoly and Duopoly markets in 2006 than in 2000 Fewer markets with more than 3 competitors in 2006 7
Effective Competitors 2 Effective Competition by Legacy Carriers Drops from 2000 to 2006 Competition by LCCs increases Largest drop for CO by 2006 US faces the fewest competitors in 2000, but together with DL is the only airline which faces higher competition in 2006 By 2006 DL and NW are the carriers most exposed to LCC competitors Average Number of Competitors 3.5 3 2.5 2 1.5 1 0.5 0 0.06 0.02 0.08 0.78 0.83 0.73 2000 0.14 0.13 0.76 0.91 0.08 0.53 2.19 2.37 1.97 2.37 2.07 1.96 AA CO DL NW UA US Competition by Legacy Competition by LCC Competition by others 0.12 0.07 0.93 0.90 0.07 2006 0.18 1.03 1.01 0.15 0.05 0.96 0.92 1.52 1.63 1.69 1.69 1.57 1.74 AA CO DL NW UA US Competition by Legacy Competition by LCC Competition by others 8
Yield Premium Approach A new variable was introduced on the data set: Yield Index YI ij = (Airline i Yield in a market j) / (Avg Yield in market j) The avg yield index of every airline across all markets in one year was calculated by weighting in respect to pax on each market: Avg Weighted Yield Index AX i = (YI ij Pax of airline i on market j) / (Pax of airline i) AX i from 2000 to 2006 was plotted for the major Legacy Airlines and LCCs. 9
Results: Legacy Carriers 1 The legacy carriers that maintain a yield premium are grouped together. These airlines operate constantly above the average yield. 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 Average Weighted Yield Index (Legacy 1) CO UA AA NW 10
Results: Legacy Carriers 2 Delta Air Lines and US Airways are the only legacy carriers that show a yield below average for most years during the period 2000-06. US improves since 2002 America West, although it is considered an LCC, produces yields above average. 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 Average Weighted Yield Index (Legacy 2) US HP DL 11
Results: LCC 1 Major LCCs have a yield lower than the average from 2000 to 2006 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 Average Weighted Yield Index (LCC 1) B6 FL WN 12
Results: LCC 2 Other LCC carriers are below average yield, except Alaska Airlines 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 Average Weighted Yield Index (LCC 2) AS HA NK F9 TZ 13
Hub analysis: Yield Premium The yield index at the Hub Markets of each Legacy Carrier was evaluated and compared to the overall yield index of the carrier The hubs considered were: Atlanta (Delta) Chicago O Hare (American, United) Charlotte (US) Cincinnati (Delta) Cleveland (Continental) Dallas Fort Worth (American) Denver (United) Detroit (Northwest) Houston (Continental) Memphis (Northwest) Minneapolis St Paul (Northwest) New York (Continental) Philadelphia (US) Pittsburgh (US) Salt Lake City (Delta) 14
Hub Analysis: Overall Trends Legacy Carriers Overall Traffic From Hub and Non-hub Markets Thousands 160 140 120 100 80 60 40 20 0 Hub Non-hub Legacy Carriers Overall Revenues From Hub and Non-hub Markets $250 $200 $150 $100 Legacy Carriers Average Fare At Hub and Non-hub Markets Millions $30 $25 $20 $50 $0 $15 $10 Hub Non-hub $5 $0 Hub Non-Hub 15
American Hub Premium AMERICAN Number of % of Total Revenues Markets in 2006 in 2006 Dallas/ Fort Worth 61 33% Chicago O'Hare 62 21% Non-hub Markets 255 48% Overall 377 100% YI 1.195 1.180 1.165 1.150 1.135 1.120 1.105 1.090 1.075 1.060 1.045 1.030 1.015 1.000 0.985 0.970 0.955 0.940 0.925 0.910 0.895 0.880 0.865 0.850 American Hub Premium Dallas/ Fort Worth Chicago O'Hare Overall Non-hub Markets 16
Continental Hub Premium YI 1.195 1.180 1.165 1.150 1.135 1.120 1.105 1.090 1.075 1.060 1.045 1.030 1.015 1.000 0.985 0.970 0.955 0.940 0.925 0.910 0.895 0.880 0.865 0.850 CONTINENTAL Number of % of Total Revenues Markets in 2006 in 2006 New York 65 58% Cleveland 21 11% Houston 51 35% Non-hub Markets 56 3% Overall 190 100% Continental Hub Premium Cleveland Houston New York Overall Non-hub Markets 17
Delta Hub Premium YI 1.195 1.180 1.165 1.150 1.135 1.120 1.105 1.090 1.075 1.060 1.045 1.030 1.015 1.000 0.985 0.970 0.955 0.940 0.925 0.910 0.895 0.880 0.865 0.850 DELTA Number of % of Total Revenues Markets in 2006 in 2006 Cincinatti 14 7% Atlanta 56 47% Salt Lake City 27 10% Non-hub Markets 223 37% Overall 318 100% Delta Hub Premium Atlanta Cincinatti Salt Lake City Overall Non-hub Markets 18
Northwest Hub Premium YI 1.195 1.180 1.165 1.150 1.135 1.120 1.105 1.090 1.075 1.060 1.045 1.030 1.015 1.000 0.985 0.970 0.955 0.940 0.925 0.910 0.895 0.880 0.865 0.850 NORTHWEST Number of % of Total Revenues Markets in 2006 in 2006 Memphis 7 4% Detroit 32 37% Minneapolis/ St. Paul 36 48% Non-hub Markets 74 12% Overall 148 100% Northwest Hub Premium Detroit Memphis Minneapolis/ St. Paul Overall Non-hub Markets 19
United Hub Premium YI 1.195 1.180 1.165 1.150 1.135 1.120 1.105 1.090 1.075 1.060 1.045 1.030 1.015 1.000 0.985 0.970 0.955 0.940 0.925 0.910 0.895 0.880 0.865 0.850 UNITED Number of % of Total Revenues Markets in 2006 in 2006 Washington DC 43 18% Chicago O'Hare 64 30% Denver 46 21% Non-hub Markets 186 36% Overall 336 100% United Hub Premium Chicago O'Hare Denver Washington DC Overall Non-hub Markets 20
US Hub Premium YI 1.195 1.180 1.165 1.150 1.135 1.120 1.105 1.090 1.075 1.060 1.045 1.030 1.015 1.000 0.985 0.970 0.955 0.940 0.925 0.910 0.895 0.880 0.865 0.850 US Number of % of Total Revenues Markets in 2006 in 2006 Charlotte 18 18% Pittsburgh 17 10% Philadelphia 33 35% Non-hub Markets 116 40% Overall 183 100% US Hub Premium Charlotte Philadelphia Pittsburgh Overall Non-hub Markets 21
Summary Legacy carriers have a yield premium in the Top US markets. LCCs yield index is always below 1 with a very stable pattern All six legacy carriers generate higher yields than their competitors in their own hub markets but lower than average in the non-hub markets. AA s yield premium is constantly decreasing since 2000 both in hub and non-hub markets. CO is very strong in its EWR hub while the yield index in its non-hub markets is rising. Losing pricing power in IAH hub. NW s yield index is very low in non-hub markets but is improving since 2002. US s yield index has been improving since 2003 in all of its hub and non-hub markets. 22
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Objectives 2 Perform a disaggregate analysis of US Domestic markets from years 2000 to 2005 in order to: Identify differences in yield premium, revenues, traffic and market share for each carrier for different market segmentations: Markets with and without significant LCC presence. Short, medium, long haul markets. Hub vs non-hub markets. 24
Sample Size Millions 140 120 PDEW RPMs in the Sample Markets as % of Total Domestic PDEW Traffic in 2006 100 80 60 40 55% 62% 49% 57% 71% 20 39% 51% 65% 58% 856 markets out of the Top 1000 Markets appeared every year from 2000 to 2005. These 856 markets constitute the market sample analyzed. RPMs in Sample markets for major airlines range from 39 to 71% of the total domestic. Revenues range is higher. Millions 0 $16 $12 $8 AA CO DL NW UA US B6 FL WN Sample Markets Total Domestic PDEW Revenues in the Sample Markets as % of Total Domestic PDEW Revenues in 2006 57% 76% 62% 55% 68% $4 41% 59% 68% 57% $- AA CO DL NW UA US B6 FL WN Sample Markets Total Domestic 25
Initial Analysis Per Carrier: Traffic Thousands 100 90 80 70 60 50 40 30 20 10 0 Change in Major Carriers PDEW Traffic in the Sample Markets 27% 29% -25% -7% 18% 1% -37% 1417% 167% AA CO DL NW UA US B6 FL WN 2000 2006 26
Initial Analysis Per Carrier: Revenues Change in Major Carriers PDEW Revenues in the Sample Markets Millions $12 $10 1% 50% $8-24% $6-2% -25% $4 $2-8% -38% 1885% 175% $- AA CO DL NW UA US B6 FL WN 2000 2006 27
Initial Analysis Per Carrier: Average Fare $250 Change in Major Carriers Average Fare in the Sample Markets $200 $150-22% -17% 0% -9% -18% -1% 31% $100 3% 18% $50 $- AA CO DL NW UA US B6 FL WN 2000 2006 28
Per Carrier Initial Analysis: Market Participation 500 450 400 350 300 250 200 150 100 50 0 Change in Major Carriers Market Participation in the Sample Markets 16% 5% 3% -34% -22% -16% -8% 182% 567% AA CO DL NW UA US B6 FL WN 2000 2006 29
Effective Competition per Carrier With how many carriers (LCC and Legacy) on average does each of the legacy carriers compete across the Top 856 Markets. Mean competition decreased during the period 2000-06. AA CO DL NW UA US Year Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. 2000 3.071 1.567 3.172 1.697 2.774 1.584 3.269 1.951 3.123 1.558 2.569 1.694 2001 3.052 1.461 3.174 1.579 2.851 1.532 3.313 1.850 3.092 1.469 2.658 1.610 2002 2.874 1.351 2.951 1.507 2.733 1.426 3.271 1.714 3.039 1.359 2.618 1.446 2003 2.778 1.344 2.862 1.508 2.702 1.389 3.126 1.546 2.900 1.327 2.603 1.400 2004 2.764 1.387 2.802 1.491 2.648 1.446 3.027 1.592 2.856 1.325 2.663 1.334 2005 2.578 1.412 2.753 1.542 2.673 1.490 2.709 1.659 2.756 1.332 2.454 1.329 2006 2.568 1.383 2.594 1.429 2.787 1.421 2.872 1.463 2.682 1.303 2.705 1.325 30
Competition per Carrier Average Competition Drops from 2000 to 2006 Competition more concentrated around the average for 2006 (smaller error bars) Largest drop for CO by 2006 US faces the smallest competition in 2000 but is the only airline which faces higher competition in 2006 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Mean Competition By Airline in 2000 and 2006 AA CO DL NW UA US 2000 2006 31
Further Analysis The Yield Index for all carriers was determined for the following segments of the top 856 O-D markets: Avg Haul Segmentation Avg market haul < 500 miles 500 miles < Avg market haul < 1500 miles Avg market haul > 1500 miles. LCC presence Markets with LCC market share above 10% Markets with LCC market share below 10% Hub Analysis Yield Index of legacy carriers at markets originating from their hubs 32
Low fare presence analysis Markets segmented in terms of the market share of low fare carriers in two categories: LCC market share above 10% LCC market share below 10% Low Fare Presence > 10% Low Fare Presence < 10% 1.200 1.200 1.150 1.150 YI 1.100 1.050 1.000 0.950 AA CO DL NW UA US YI 1.100 1.050 1.000 0.950 AA CO DL NW UA US 0.900 0.900 0.850 0.850 33
Average Haul Segmentation 1 Avg Haul > 1500 miles: Legacy Carriers 1 Avg Haul segmentation for CO, UA, AA, NW 1.300 1.150 1.000 0.850 0.700 0.550 CO UA AA NW Avg Haul < 500 miles: Legacy Carriers 1 500 < Avg Haul < 1500 miles: Legacy Carriers 1 1.300 1.300 1.150 1.150 1.000 1.000 0.850 0.850 0.700 0.700 0.550 0.550 CO UA AA NW CO UA AA NW 34
Average Haul Segmentation 2 Avg Haul > 1500 miles: Legacy Carriers 2 Avg haul segmentation for US, DL, HP 1.300 1.150 1.000 0.850 0.700 0.550 US HP DL Avg Haul < 500 miles: Legacy Carriers 2 500 < Avg Haul < 1500 miles: Legacy Carriers 2 1.300 1.300 1.150 1.150 1.000 1.000 0.850 0.850 0.700 0.700 0.550 0.550 US HP DL US HP DL 35
Average Haul Segmentation 3 Avg Haul segmentation WN, B6, FL 1.300 1.150 Avg Haul > 1500 miles: Major LCCs 1.000 0.850 0.700 Avg Haul < 500 miles: Major LCCs 0.550 WN B6 FL 500 < Avg Haul < 1500 miles: Major LCCs 1.300 1.300 1.150 1.150 1.000 1.000 0.850 0.850 0.700 0.700 0.550 0.550 WN B6 FL WN B6 FL 36