MIT MIT ICAT ICAT

Price Competition in the Top US Domestic Markets:

Revenues and Yield Premium

Nikolas PyrgiotisDr P. Belobaba

2

MIT MIT ICAT ICAT 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

3

MIT MIT ICAT ICAT Data Sample

10% sample of tickets of all US airlines which

operate a/c with capacity greater than

60 seats

US DOT Data Base Products

O&D Plus

Data source: O&D PlusSummary of all domestic O-D markets by carrier by quarter

Top 1000 US domestic markets extracted from O&D Plus for the period 2000-06Database: 856 OD markets that appeared every year in the Top 1000 markets

Traffic, Revenues, Yield, Market Share, Average HaulWithin each market airlines with market share below 5% are excluded from the database

4

MIT MIT ICAT ICAT

Changes in Overall Traffic and Revenue

Total PDEW Traffic and Revenue in Top 856 Markets

320

340

360

380

400

420

440

2000 2001 2002 2003 2004 2005 2006

Thou

sand

s

$0

$10

$20

$30

$40

$50

$60

$70

Mill

ions

TrafficRevenues

5

MIT MIT ICAT ICAT 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 LCC Group

American Airlines Airtran/Frontier

Continental Airlines America West Airlines

Delta Air Lines Frontier Airlines

Northwest Airlines Jet Blue

United Airlines Southwest Airlines

US Airways Spirit Air Lines

6

MIT MIT ICAT ICAT Legacy Group vs LCC Group

PDEW Revenues in Top 856 Markets

$-

$5

$10

$15

$20

$25

$30

$35

$40

$45

2000 2001 2002 2003 2004 2005 2006

Milli

ons

Legacy Group LCC Group

PDEW Traffic in Top 856 Markets

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006

Thou

sand

s

Legacy Group LCC Group

Average Fare in Top 856 Markets

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2000 2001 2002 2003 2004 2005 2006

Legacy Group LCC Group

$90.44 $54.67

7

MIT MIT ICAT ICAT Effective Competitors

Effective Competitors in the Top 856 Markets in 2000 and 2006:Average Number of Competitors per marketExcluding airlines with Market Share below 5%

Change in Competition from 2000 to 2006

0%

5%

10%

15%

20%

25%

30%

35%

40%

1 2 3 4 5 6 7 8 9

No of Competitors

% o

f Sam

ple

Mar

kets

2000 2006Effective Competitors drop from 3.18 in 2000 to 2.95 in 2006More Monopoly and Duopoly markets in 2006 than in 2000Fewer markets with more than 3 competitors in 2006

8

MIT MIT ICAT ICAT Effective Competitors 2Effective Competition by Legacy Carriers Drops from 2000 to 2006Competition by LCCs increasesLargest drop for CO by 2006US faces the fewest competitors in 2000, but together with DL is the only airline which faces higher competition in 2006By 2006 DL and NW are the carriers most exposed to LCC competitors

2000

2.19 2.371.97

2.372.07 1.96

0.830.78

0.73

0.760.91

0.53

0.06 0.02

0.08

0.140.13

0.08

0

0.5

1

1.5

2

2.5

3

3.5

AA CO DL NW UA US

Ave

rage

Num

ber

of C

ompe

titor

s

Competition by Legacy Competition by LCC Competition by others

2006

1.52 1.63 1.69 1.69 1.57 1.74

0.93 0.90 1.03 1.010.96

0.92

0.12 0.070.07 0.18

0.15 0.05

AA CO DL NW UA USCompetition by Legacy Competition by LCC Competition by others

9

MIT MIT ICAT ICAT Yield Premium ApproachA new variable was introduced on the data set:

Yield Index YIij = (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 AXi = ∑(YIij × Pax of airline i on market j) / ∑(Pax of airline i)

AXi from 2000 to 2006 was plotted for the major Legacy Airlines and LCCs.

10

MIT MIT ICAT ICAT Results: Legacy Carriers 1

The legacy carriers that maintain a yield premium are grouped together.These airlines operate constantly above the average yield.

Average Weighted Yield Index (Legacy 1)

0.700.750.800.850.900.951.001.051.101.151.20

2000 2001 2002 2003 2004 2005 2006

CO UA AA NW

11

MIT MIT ICAT ICAT 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 2002America West, although it is considered an LCC, produces yields above average.

Average Weighted Yield Index (Legacy 2)

0.700.750.800.850.900.951.001.051.101.151.20

2000 2001 2002 2003 2004 2005 2006

US HP DL

12

MIT MIT ICAT ICAT Results: LCC 1

Major LCCs have a yield lower than the average from 2000 to 2006

Average Weighted Yield Index (LCC 1)

0.700.750.800.850.900.951.001.051.101.151.20

2000 2001 2002 2003 2004 2005 2006

B6 FL WN

13

MIT MIT ICAT ICAT Results: LCC 2

Other LCC carriers are below average yield, except Alaska Airlines

Average Weighted Yield Index (LCC 2)

0.700.750.800.850.900.951.001.051.101.151.20

2000 2001 2002 2003 2004 2005 2006

AS HA NK F9 TZ

14

MIT MIT ICAT ICAT 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 carrierThe 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)

15

MIT MIT ICAT ICAT Hub Analysis: Overall TrendsLegacy Carriers Overall Traffic From Hub and Non-hub Markets

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006

Thou

sand

s

Hub Non-hub

Legacy Carriers Overall Revenues From Hub and Non-hub Markets

$0

$5

$10

$15

$20

$25

$30

2000 2001 2002 2003 2004 2005 2006

Mill

ions

Hub Non-Hub

Legacy Carriers Average Fare At Hub and Non-hub Markets

$0

$50

$100

$150

$200

$250

2000 2001 2002 2003 2004 2005 2006

Hub Non-hub

16

MIT MIT ICAT ICAT American Hub Premium

American Hub Premium

0.8500.8650.8800.8950.9100.9250.9400.9550.9700.9851.0001.0151.0301.0451.0601.0751.0901.1051.1201.1351.1501.1651.1801.195

2000 2001 2002 2003 2004 2005 2006

YI

Dallas/ Fort Worth Chicago O'Hare Overall Non-hub Markets

AMERICAN Number of Markets in 2006

% of Total Revenues in 2006

Dallas/ Fort Worth 61 33%Chicago O'Hare 62 21%Non-hub Markets 255 48%Overall 377 100%

17

MIT MIT ICAT ICAT Continental Hub Premium

Continental Hub Premium

0.8500.8650.8800.8950.9100.9250.9400.9550.9700.9851.0001.0151.0301.0451.0601.0751.0901.1051.1201.1351.1501.1651.1801.195

2000 2001 2002 2003 2004 2005 2006

YI

Cleveland Houston New York Overall Non-hub Markets

CONTINENTAL Number of Markets in 2006

% of Total Revenues in 2006

New York 65 58%Cleveland 21 11%Houston 51 35%Non-hub Markets 56 3%Overall 190 100%

18

MIT MIT ICAT ICAT Delta Hub Premium

Delta Hub Premium

0.8500.8650.8800.8950.9100.9250.9400.9550.9700.9851.0001.0151.0301.0451.0601.0751.0901.1051.1201.1351.1501.1651.1801.195

2000 2001 2002 2003 2004 2005 2006

YI

Atlanta Cincinatti Salt Lake City Overall Non-hub Markets

DELTA Number of Markets in 2006

% of Total Revenues in 2006

Cincinatti 14 7%Atlanta 56 47%Salt Lake City 27 10%Non-hub Markets 223 37%Overall 318 100%

19

MIT MIT ICAT ICAT Northwest Hub Premium

Northwest Hub Premium

0.8500.8650.8800.8950.9100.9250.9400.9550.9700.9851.0001.0151.0301.0451.0601.0751.0901.1051.1201.1351.1501.1651.1801.195

2000 2001 2002 2003 2004 2005 2006

YI

Detroit Memphis Minneapolis/ St. Paul Overall Non-hub Markets

NORTHWEST Number of Markets in 2006

% of Total Revenues in 2006

Memphis 7 4%Detroit 32 37%Minneapolis/ St. Paul 36 48%Non-hub Markets 74 12%Overall 148 100%

20

MIT MIT ICAT ICAT United Hub Premium

United Hub Premium

0.8500.8650.8800.8950.9100.9250.9400.9550.9700.9851.0001.0151.0301.0451.0601.0751.0901.1051.1201.1351.1501.1651.1801.195

2000 2001 2002 2003 2004 2005 2006

YI

Chicago O'Hare Denver Washington DC Overall Non-hub Markets

UNITED Number of Markets in 2006

% of Total Revenues in 2006

Washington DC 43 18%Chicago O'Hare 64 30%Denver 46 21%Non-hub Markets 186 36%Overall 336 100%

21

MIT MIT ICAT ICAT US Hub Premium

US Hub Premium

0.8500.8650.8800.8950.9100.9250.9400.9550.9700.9851.0001.0151.0301.0451.0601.0751.0901.1051.1201.1351.1501.1651.1801.195

2000 2001 2002 2003 2004 2005 2006

YI

Charlotte Philadelphia Pittsburgh Overall Non-hub Markets

US Number of Markets in 2006

% of Total Revenues in 2006

Charlotte 18 18%Pittsburgh 17 10%Philadelphia 33 35%Non-hub Markets 116 40%Overall 183 100%

22

MIT MIT ICAT ICAT 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.

MIT MIT ICAT ICAT

Deleted Slides

24

MIT MIT ICAT ICAT 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.

25

MIT MIT ICAT ICAT Sample Size

PDEW RPMs in the Sample Markets as % of Total Domestic PDEW Traffic in 2006

0

20

40

60

80

100

120

140

AA CO DL NW UA US B6 FL WN

Mill

ions

Sample Markets Total Domestic

55%

62%49%

39%

57%

51% 65%58%

71%

PDEW Revenues in the Sample Markets as % of Total Domestic PDEW Revenues in 2006

$-

$4

$8

$12

$16

AA CO DL NW UA US B6 FL WN

Mill

ions

Sample Markets Total Domestic

57%

68% 55%

41%

62%

59%68%

57%

76%

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.

26

MIT MIT ICAT ICAT Initial Analysis Per Carrier: Traffic

Change in Major Carriers PDEW Traffic in the Sample Markets

0102030405060708090

100

AA CO DL NW UA US B6 FL WN

Thou

sand

s

2000 2006

29%

18%-25%

1%

-7%

-37% 1417%167%

27%

27

MIT MIT ICAT ICAT Initial Analysis Per Carrier: Revenues

Change in Major Carriers PDEW Revenues in the Sample Markets

$-

$2

$4

$6

$8

$10

$12

AA CO DL NW UA US B6 FL WN

Mill

ions

2000 2006

1%

-2%-25%

-8%

-24%

-38%1885%

175%

50%

28

MIT MIT ICAT ICAT

Initial Analysis Per Carrier: Average Fare

Change in Major Carriers Average Fare in the Sample Markets

$-

$50

$100

$150

$200

$250

AA CO DL NW UA US B6 FL WN2000 2006

-22% -17%0% -9%

-18%-1%

31%3% 18%

29

MIT MIT ICAT ICAT

Per Carrier Initial Analysis: Market Participation

Change in Major Carriers Market Participation in the Sample Markets

050

100150200250300350400450500

AA CO DL NW UA US B6 FL WN2000 2006

5%

-16%

-34%

-8%

3%

-22%

567%

182%

16%

30

MIT MIT ICAT ICAT 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.

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 1.6942001 3.052 1.461 3.174 1.579 2.851 1.532 3.313 1.850 3.092 1.469 2.658 1.6102002 2.874 1.351 2.951 1.507 2.733 1.426 3.271 1.714 3.039 1.359 2.618 1.4462003 2.778 1.344 2.862 1.508 2.702 1.389 3.126 1.546 2.900 1.327 2.603 1.4002004 2.764 1.387 2.802 1.491 2.648 1.446 3.027 1.592 2.856 1.325 2.663 1.3342005 2.578 1.412 2.753 1.542 2.673 1.490 2.709 1.659 2.756 1.332 2.454 1.3292006 2.568 1.383 2.594 1.429 2.787 1.421 2.872 1.463 2.682 1.303 2.705 1.325

UA USAA CO DL NW

31

MIT MIT ICAT ICAT Competition per Carrier

Average Competition Drops from 2000 to 2006Competition more concentrated around the average for 2006 (smaller error bars)Largest drop for CO by 2006US faces the smallest competition in 2000 but is the only airline which faces higher competition in 2006

Mean Competition By Airline in 2000 and 2006

0.00.51.01.52.02.53.03.54.04.5

AA CO DL NW UA US2000 2006

32

MIT MIT ICAT ICAT 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 miles500 miles < Avg market haul < 1500 milesAvg market haul > 1500 miles.

LCC presenceMarkets with LCC market share above 10%Markets with LCC market share below 10%

Hub AnalysisYield Index of legacy carriers at markets originating from their hubs

33

MIT MIT ICAT ICAT 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%

0.850

0.900

0.950

1.000

1.050

1.100

1.150

1.200

2000 2001 2002 2003 2004 2005 2006

YI

AACODLNWUAUS

Low Fare Presence < 10%

0.850

0.900

0.950

1.000

1.050

1.100

1.150

1.200

2000 2001 2002 2003 2004 2005 2006

YI

AACODLNWUAUS

34

MIT MIT ICAT ICAT Average Haul Segmentation 1

Avg Haul > 1500 miles: Legacy Carriers 1

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

CO UA AA NW

Avg Haul segmentation for CO, UA, AA, NW

Avg Haul < 500 miles: Legacy Carriers 1

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

CO UA AA NW

500 < Avg Haul < 1500 miles: Legacy Carriers 1

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

CO UA AA NW

35

MIT MIT ICAT ICAT Average Haul Segmentation 2

Avg haul segmentation for US, DL, HP

Avg Haul < 500 miles: Legacy Carriers 2

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

US HP DL

500 < Avg Haul < 1500 miles: Legacy Carriers 2

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

US HP DL

Avg Haul > 1500 miles: Legacy Carriers 2

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

US HP DL

36

MIT MIT ICAT ICAT Average Haul Segmentation 3

Avg Haul > 1500 miles: Major LCCs

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

WN B6 FL

Avg Haul segmentation WN, B6, FL

Avg Haul < 500 miles: Major LCCs

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

WN B6 FL

500 < Avg Haul < 1500 miles: Major LCCs

0.550

0.700

0.850

1.000

1.150

1.300

2000 2001 2002 2003 2004 2005 2006

WN B6 FL