Introduction to Air Transport Economics: From Theory to Applications PDF
Preview Introduction to Air Transport Economics: From Theory to Applications
IntroductIon to AIr trAnsport EconomIcs Reviews of the first edition of Introduction to Air Transport Economics This is a landmark textbook in airline economics as, for the first time, disparate information from various economic disciplines is integrated with key institutional factors that affect the industry. Basic material is presented in an easy-to-read and understand format with plenty of real-world situations. Much of the material in this book cannot be found in other sources. I highly recommend this book. Darryl Jenkins, Ohio State Airline Operations Center, USA This book represents a thorough and comprehensive coverage of the key topics in aviation economics by applying fundamental theories and methods available in micro-economics and industrial organization economics. This book also treats excellently the current policy and strategic issues facing policy makers, airlines, airports and other professionals in aviation. This is a rare book that combines both theory and applications in a very meaningful way. As such, I recommend it very strongly to graduate students, policy makers, managers and researchers in aviation. Tae H. Oum, Air Transport Research Society (ATRS) and University of British Columbia, Canada The aviation industry provides a good backdrop for understanding a variety of economic principals. Introduction to Air Transport Economics offers valuable insight into how the fundamentals of economics apply to aviation. The book covers a broad range of topics from underlying passenger demand to aviation infrastructure. It offers an overview into the dynamic industry environment while using practical industry applications to explain general economic concepts—a great introduction to the world of aviation and explanation for what keeps airlines in the air. Zane Rowe, Senior Vice President Network Strategy, Continental Airlines In helping to establish a new international university with a focus on aviation, I have recently had the opportunity to review many books and materials that might be critical as a resource for our future students. The authors’ new book, Introduction to Air Transport Economics, is just such a resource. I was privileged to see this book early on, and I was immediately struck with its scope and timeliness. Most importantly, it provides a look at the industry from the keen perspective of a distinguished economist. So, rather than another survey of industry trends, this book takes rigorous, well established economic principles and applies them to the most important aspects of the international aviation industry. Even in areas such as safety and security, the authors provide clear insight to show how it is economics that drives the successful airlines to adhere to the highest standards of safety and security. I believe that this book will be used by faculties and students, worldwide, in their effort to understand, and then manage, the activities of the aviation industry. Irwin Price, Dubai Aerospace Enterprise University Dr Vasigh has produced a detailed introduction to the subject of airline economics, covering both the theory and its application to the modern air transportation industry. Students and those already engaged in the industry will find this an illuminating guide to an ever more complex business. Barry Humphreys, Virgin Atlantic Airways Introduction to Air Transport Economics: From Theory to Application provides a comprehensive treatment of the economics of the commercial air transport industry. Written in easy-to-read, jargon- free English, the book first reviews the fundamentals of economics, using air transport examples, to illustrate concepts related to demand, costs, and competition. Specific chapters then cover, again from an economic perspective, key topic areas, such as the emergence of low cost carriers, international air transport, and aviation infrastructure. The book will be beneficial to those seeking a deeper understanding of the workings of the major players in the air transport industry, including airlines, airports, and aircraft manufacturers. Readers will learn, for example, how airlines use revenue management to maximize their profits or how airlines and airports forecast passenger traffic. Since the book does cover economic principles, it can be read as a standalone text by undergraduates and graduate students with limited backgrounds in economics. Those students with a deeper understanding of economics, at the intermediate level or higher, can read quickly through the principles chapters and delve directly into the airline applications. Martin Dresner, University of Maryland, USA Introduction to Air Transport Economics From Theory to Applications Second Edition BIJAN VASIgH Embry-Riddle Aeronautical University, Florida, USA kEN FlEMINg ACG Aviation Consulting Group LLC, Florida, USA & thomAs tAckEr Embry-Riddle Aeronautical University, Florida, USA © Bijan Vasigh, ken Fleming and Thomas Tacker 2013 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Bijan Vasigh, ken Fleming and Thomas Tacker have asserted their moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the authors of this work. Published by Ashgate Publishing limited Ashgate Publishing Company Wey Court East 110 Cherry Street Union Road Suite 3-1 Farnham Burlington Surrey, gU9 7PT VT 05401-3818 England USA www.ashgate.com British Library Cataloguing in Publication Data Vasigh, Bijan. Introduction to air transport economics : from theory to applications. -- 2nd ed. 1. Aeronautics, Commercial--Finance. 2. Airlines-- Deregulation. 3. Airlines--Cost of operation. 4. Aeronautics and state. 5. Aeronautics, Commercial-- United States. I. Title II. Fleming, ken. III. Tacker, Tom. 387.7'1-dc23 ISBN: 978-1-4094-5486-1 (hbk) 978-1-4094-5487-8 (pbk) 978-1-4094-5488-5 (ebk) 978-1-4724-0024-6 (epub) Library of Congress Cataloging-in-Publication Data Vasigh, Bijan. Introduction to air transport economics : from theory to applications / by Bijan Vasigh, ken Fleming, and Thomas Tacker. p. cm. Includes bibliographical references and index. ISBN 978-1-4094-5486-1 (hardback) -- ISBN 978-1-4094-5487-8 (ebook) 1. Aeronautics, Commercial--United States--Finance. 2. Airlines--Deregulation--United States. 3. Airlines--United States--Cost of operation. 4. Aeronautics and state--United States. I. Fleming, ken. II. Tacker, Tom. III. Title. HE9803.A5V37 2013 387.7'10973--dc23 V 2012030097 Contents List of Figures xi List of Tables xv Glossary of Terms xix List of Abbreviations xxvii About the Authors xxxi Acknowledgements xxxiii Foreword xxxv Preface to the Second Edition xxxvii 1 The Evolving Air Transport Industry 1 The Airline Industry 2 Financial Condition of the Airline Industry 6 Consolidation and Bankruptcies 12 Factors Affecting World Air Traffic growth 17 Economic Impact of the Air Transport Industry 19 Outlook for the Air Transport Industry 22 Summary 23 Discussion Questions 24 References 24 2 Principles of Economics with Applications in Aviation 27 Basic Economics 28 Scope of Economics 29 The Role of Economic Systems 33 government Failures and Market Failures 38 Summary 41 Discussion Questions 43 References 43 3 Supply and Demand: Analysis in the Airline Industry 45 Basics of Demand 46 Basics of Supply 62 Market Equilibrium 67 Consumer and Producer Surplus 76 Disequilibrium 80 Elasticity 81 Summary 93 Discussion Questions 94 References 95 vI IntroductIon to AIr tr Ansport EconomIcs 4 Cost and Production Analysis: The General Concepts 97 Cost Division 98 Cost Functions 105 Economies of Scale, Scope, and Density 112 Airline Industry Cost Structure 116 Airline Economies of Scale, Scope, and Density 124 Airline Breakeven Analysis 126 Operating leverage 128 Airline Operating leverage 130 Summary 130 Discussion Questions 131 Appendix: Airline Cost Classification and Division 132 References 133 5 Aviation Infrastructure: Operations and Ownership 135 Air Traffic Control System 136 Institutional Problems in US Air Traffic Control 141 Air Traffic Control in a government Corporation 142 Political Obstacles to Reform 143 Solutions to Air Traffic Control Problems 143 Airport Ownership and Management 145 Summary 152 Discussion Questions 152 Appendix 152 References 154 6 International Economics and Aviation 155 Trade globalization 156 International Economics and Trade 158 Why Nations Trade 166 Aircraft Manufacturing and governmental Subsidies 173 International Trade Policy in Air Travel—Optimality versus Political Realities 175 Foreign Currency and Exchange Rates 178 Summary 181 Discussion Questions 181 Appendix: International Free Trade Agreements 182 References 186 7 Open Skies and Global Alliances 189 Chronology of International Air Transport Agreements 190 Bilateral and Multilateral Air Service Agreements 191 Open Skies in Europe 198 Open Skies in Asia 199 global Airline Alliances 201 Summary 210 Discussion Questions 211 References 211 contEnts vII 8 Competitive Market Structure and Monopolistic Markets 215 Perfect Competition 216 Monopoly 224 Price/Output Decision for Monopolies 230 Monopoly Pricing and Consumer Well-being 234 Monopoly Market Power in Aviation 235 Monopsony 240 Summary 240 Discussion Questions 241 References 242 9 Hybrid Market Structure and the Aviation Industry 245 Monopolistic Competition 246 Oligopolies 248 Examples of Oligopoly 252 Contestability Theory 256 kinked Demand Curve Theory 259 Cournot Theory 260 Price–Output Determination under hybrid Market Structure 262 Profitability Issues 265 Competition and Anti-trust Issues 268 Industry Consolidation 272 Beyond Market Concentration Considerations 278 Anti-trust, Market Evolution, and Cooperation 279 Summary 280 Discussion Questions 280 References 281 10 Aviation Forecasting and Regression Analysis 283 Aviation Forecasting Applications 284 Qualitative Forecasting Methods 285 Quantitative Forecasting Methods 289 Descriptive Statistics 290 Time-series Analysis 293 Time-series Forecasting 296 Forecast Accuracy 304 Regression Analysis 308 Data Sources 324 Summary 328 Discussion Questions 328 References 331 11 Dynamic Pricing Policy and Revenue Management 333 Dynamic Pricing Policy 334 Cost-based Pricing 336 Markup and Price Elasticity of Demand 337 Bundling 338 Unbundling and Airline Ancillary Revenue 339 vIII IntroductIon to AIr tr Ansport EconomIcs Market Skimming and Penetration Pricing 340 Peak-load Pricing 341 Price Discrimination 341 Consumer Surplus 342 Necessary Conditions for Price Discrimination 342 Degrees of Price Discrimination 344 Uniform Pricing versus Price Discrimination 345 Importance of Revenue Management 347 Scenario: Uniform versus Multiple Pricing 349 Revenue Management “Fences” 351 Revenue Management Control Types 354 Spoilage and Spillage 356 leg-based Expected Marginal Seat Revenue Model 358 Overbooking 365 Other Issues Associated with Revenue Management 369 Summary 369 Discussion Questions 370 Appendix: Derivation of Overbooking Probability Equation 371 References 371 12 Low-cost and Start-up Airlines: A New Paradigm 373 The Evolution of the Industry 374 Characteristics of low-cost Carriers 377 Cost Structure Comparison 388 Incumbent Carriers’ Response to low-cost Carriers 393 The Future of low-cost Carriers 396 Summary 397 Discussion Questions 397 Appendix: Select Airline Two letter Codes 398 References 398 13 The Economics of Aviation Safety and Security 401 The Basics of Aviation Safety 402 The History of Aviation Safety 404 Incentives for Aviation Safety 407 Causes of Aviation Accidents 410 Basic Economics of Safety 418 Politics and Safety Regulation 419 Accident Prevention 420 Summary 422 Discussion Questions 422 References 422 14 An Overview of Macroeconomics for Managers 425 Economic growth 426 Unemployment 429 Inflation 434 Monetary Policy 439 contEnts Ix Fiscal Policy 441 The Sovereign (government) Debt Crisis 445 Can the US Avoid greece’s Fate? 447 What is the Future of the World Economy? 449 Summary 450 Discussion Questions 450 References 451 Airport and Airline Codes 453 List of Countries by GDP (2012) 459 Traffic Movements (2012) 461 Passenger Traffic (2010) 463 Index 465
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