Tae Hoon Oum

Airline Network Rivalry

In this paper, the effects of the strategic interaction between deregulated airlines on their network choice are analyzed. The authors examine whether switching from a linear to a hub-spoke network confers a strategic advantage because it saves costs and improves service quality. They find that, if hubbing lowers total cost (which includes both airline and passenger inconvenience costs), the pursuit of strategic advantages usually intensifies the extent of hubbing. Even if hubbing raises total cost, it might be pursued by the airline either because hubbing is a dominant strategy in an oligopolistic setting or because hubbing will be useful in deterring entry.

Allocation of Airline Seats between Stochastically Dependent Demands

This paper examines the problem of allocating airline seats between two nested fare classes when the demands for the classes are stochastically dependent. The well known simple seat allotment formula of Littlewood which requires the assumption of statistical independence between demands is generalized to a formula which requires only a much weaker monotonic association assumption. The model employed here is also used to examine the problems of full fare passenger spillage and passenger upgrades from the discount class.

A comparative analysis of productivity performance of the world's major airports: summary report of the ATRS global airport benchmarking research report—2002

This paper compares productive efficiency for 50 major airports in Asia Pacific, Europe and North America by computing gross total factor productivity (TFP), further analysing TFP by regression models, and then computing ‘residual’ TFP after removing the effects of the factors largely beyond managerial control. The results reveal: larger airports are expected to achieve higher gross TFP because of the economies of scale in airport operations, not necessarily because they are more efficient than smaller airports; airports with a larger percentage of international traffic are expected to have lower gross TFP levels; an airports ownership structure does not appear to have any statistically significant effect on its productivity performance; airports with higher passenger satisfaction level does not appear to have lower productivity; an airport that diversify and expand their non-aeronautical activities such as concessions and other commercial services are likely to achieve a higher TFP level; airports with capacity constraints are expected to have a higher TFP level although it will impose delays on aircraft and passengers.

A productivity comparison of the world's major airlines

This paper examines the cost and productivity performance of 23 major international airlines during the 1986-1993 time period. A reliable database using yearly panel data is first constructed, and the data is then used to measure and compare cost per unit of aggregate output. The effects of input changes on the unit costs are also examined. The gross Total Factor Productivity (TFP) is also measured and compared. In order to compare true productive efficiency across airlines and over time, a residual TFP index is computed after removing effects of the variables beyond managerial control, such as average stage length and composition of outputs. Log-linear TFP level and TFP growth rate regressions are used to accomplish this task. Results show that carriers in newly industrialized countries (NICs) in Asia enjoy unit cost advantages over other major carriers, while European carriers have noticeably higher costs than the North American carriers. Findings also show that during the sample period, the major European carriers and carriers in Asian NICs achieved significantly higher productivity growth than their North American counterparts. Although the North American carriers still enjoy higher productivity efficiency than the Asian NICs and European carriers, the productivity gap has diminished significantly. European aviation liberalization, which began in 1987, appears to have produced substantial productivity gains. Average stage length and output mix have substantial effects on productivity, and changes in these variables account for a large portion of the observed TFP growth. In another finding, productivity efficiency of carriers competing in the same or similar markets tend to converge over time.

Airport pricing: Congestion tolls, lumpy investment, and cost recovery

This paper investigates the relationship between total congestion tolls and capacity costs, for congestion-prone transportation infrastructures. A model is developed which explicitly incorporates the lumpy nature of capacity expansion and demand fluctuations within a given day and over time. With constant variable costs and social marginal cost pricing, this relationship determines the cost recovery status of an infrastructure authority. The theoretical model for optimal user charges and the timing of capacity expansion shows that the relative magnitudes of total congestion tolls and total capacity costs in an investment cycle depend on the time pattern of traffic growth. A numerical experiment based on the runway services at the Toronto International Airport uses a queuing model to demonstrate the extent to which the cost recovery ratios vary across different scenarios for the time path of traffic growth. Empirical results suggest that the larger the capacity of an existing facility, the higher the ratio of congestion toll revenue to the capacity cost.

The effect of horizontal alliances on firm productivity and profitability: evidence from the global airline industry

Abstract This study examines the effect of horizontal alliances on firm performance in terms of productivity and profitability. Based on panel data from 22 international airline companies, which formed alliances during the period 1986–1995, the study reveals that horizontal alliances make a significant contribution to productivity gains, whereas they have no overall significant and positive impact on profitability. The study further shows that the level of cooperation in horizontal alliances influences the strength of the alliance effect on productivity and profitability. That is, alliances involving high-level cooperation are found to have a stronger significant and positive effect on both productivity and profitability than alliances involving low-level cooperation. Implications of the results are discussed.

Airline alliances: current status, policy issues, and future directions

This paper investigates airline alliances, including their current status and the government policies that govern them, as well as the effects of intercontinental alliances. Some predictions are made on the future direction of alliance network formation. The areas of collaboration and joint activities between alliance partners are also presented based on a survey of 46 alliances among the worlds top airlines. Findings indicate that alliances among airlines are a permanent fixture of the industry because they create value to customers and enhance profit opportunities for the partners. The cost of ending a strategic alliance and the opportunity cost of finding another partner will both increase, providing an increased stability and strengthening of alliance structures. Airlines have learned to fine-tune alliance relationships to make the gain-sharing more equitable as governments began to scrutinize alliances with one-sided gain sharing. Equity alliances tend to be unstable and in the future there will be fewer alliances with equity investment. Already there has been a decline in the growth rate of equity alliances. Balanced gain-sharing could form a basis upon which to create global alliance groups. Each global alliance group would consist of a two-tier system with an anchor carrier and several junior carriers. Gain-sharing between anchor and junior carriers could be structured so that junior carriers find incentives to route a portion of their intercontinental traffic via the anchor carriers hubs. A limited number of major global alliance networks will likely be formed in the near future, with these global alliance groups competing for the majority of the worlds air transport traffic.

Cost competitiveness of major airlines: an international comparison

This paper compares unit cost competitiveness of the worlds 22 major airlines over the 1986-93 period. First, a unit cost index for aggregate output is computed via a multilateral index procedure. A translog variable cost function is estimated and used to decompose the unit cost differentials into potential sources: input prices, network and output attributes, and efficiency. The results of the unit cost decomposition are used to construct a cost competitiveness indicator after removing the effects of network and output attributes. Our results for 1993 are: (a) Asian carriers (except Japan Airlines and All Nippon Airways) were generally more cost competitive than the major U.S. carriers, mostly due to their substantially lower input prices; (b) Japan Airlines and All Nippon Airways were over 50% less cost competitive than American Airlines mainly because of their high input prices; (c) major European carriers were 7% (British Airways)-42% (Scandinavian Airlines Systems) less cost competitive than American Airlines, because of higher input prices and lower efficiency; (d) among the U.S. carriers, American Airlines, United Airlines and Delta were similar in cost competitiveness, while Northwest and Continental enjoyed, respectively, 5 and 12% cost competitiveness over American Airlines; (e) exchange rate fluctuation has had considerable effects on the cost competitive position of Japan Airlines and Lufthansa.

A note on optimal airport pricing in a hub-and-spoke system

This paper deals with the socially optimal pricing of airports in a hub-and-spoke network, taking into account explicitly the fact that demands for airport services at hub airport and spoke airports are complementary. It is shown that a welfare gain is to be made by switching from the regime of pricing each airport independently of other airports in the network to the regime of pricing the hub and spoke airports jointly. Intuitively, given the demand complementarity, the optimal pricing of a hub-and-spoke airport network as a system may require for the hub airport to subsidize the money-losing spoke airports. Our result implies that there may be a welfare loss due to the reduction in allocation efficiency if a network of airports currently being managed by a national government are to be defederalized (or privatized) separately for each airport as being carried out in Canada and in Australia. Since one of the major reasons for defederalization (or privatization) of airports is to reduce x-inefficiency caused by the centralized, bureaucratic and inflexible management, the welfare loss due to the allocative inefficiency should be weighed against the one-time gain in x-efficiency expected from defederalization of those airports. This result calls for a caution on the current debate on airport devolution which focuses mainly on the expected one-time reduction in x-inefficiency in airport operation and management and the need for flexible attitude toward local community needs, without even discussing its effects on reduced allocative efficiency which will continue to occur in perpetuity.

Global airline alliances: international regulatory issues

The air transport industry has remained one of the most regulated and restrictive industries in international trade. Domestic deregulation and liberalization have been progressing at an uneven pace across countries, and liberalization of the international markets has yet to overcome numerous obstacles. Air carriers, on the other hand, need to build up an extensive global network to realize economies of scope and density and to meet consumer demands. To accomplish this, they need to have foreign partners. However, ownership restrictions do not allow for cross-country mergers or takeovers. As a result, alliances have become, and will remain in the near future, the primary means for expanding and strengthening airline global service networks. Alliances have provided a way for carriers to mitigate the limitations of bilateral agreements, ownership restrictions, and licensing and control regulations. In effect, both airlines and governments consider international alliances to be the second best solution to achieve free trade in world aviation. This paper discusses regulatory issues related to international airline alliances. Section 1 provides an overview of the current regulations surrounding alliance frameworks, and Section 2 contains a synthesis of economic analysis of regulatory concerns for international airline alliances. Section 3 discusses international coordination in regulations of airline alliances, and Section 4 provides a summary and conclusion.