Essays on competition and consolidation on international airline markets

Abstract

This dissertation offers an investigation of the current issues in economics of the international airline industry. The two broad issues considered are deregulation of and consolidation on the international airline markets. The process of deregulation has been and will probably remain gradual. Moreover, restrictions are often removed in such a way that players are forced to play by different rules. In this context, I measure price effects of asymmetric entry barriers at London's Heathrow airport. I find that such entry restriction decreases the fares of the affected carriers. Concurrently, I find that the airport dominance effect, shown to exist for the US domestic market, applies to the international routes as well. On the basis of my results, I suggest the following danger in the process of the gradual deregulation of international aviation. Given the strong political influences and the current industry structure, we may end up getting locked into situations, where a carrier that dominates an airport may obtain preferential treatment on the respective international routes. This can prevent entry by the more efficient carriers and/or keep the less efficient airlines in operation. As far as airline consolidation is concerned, I develop a new model of price competition between international airline alliances and test its predictions. The primary focus is on the price effects of codesharing (connecting the partner airlines' networks) and antitrust immunity (allowing the partner airlines to jointly set fares across the unified network). I show theoretically that antitrust immunity may not have negative price effects in addition to that of codesharing. This finding is contrary to what has been suggested previously. Empirical analysis confirms the theoretical predictions.