WHEN TRAINS GO FASTER THAN PLANES: THE STRATEGIC REACTION OF AIRLINES IN SPAIN

J UAN LU IS J IMÉNEZ

OFEL IA BETANCOR

IRU O JEDA RAMÍREZ

Introduction

◦ “Our results indicate that in no case the net profits from operating the existing corridors compensate the amount invested in the construction of the infrastructure. This is especially true when we focus on financial returns but also true, though to a lesser extent, when we consider other social gains that could be generated. These results show that these investments are not profitable for the investors or society” (Ofelia Betancor - Universidad de Las Palmas de Gran Canaria y FEDEA and Gerard Llobet CEMFI y CEPR) 2015

◦ Context◦ Spain: world leader in terms of high speed rail network length (2.900km))◦ Public investment. Subsidize routes.◦ Planned investment 2012-2024 – Graphs

Introduction

Modal distribution of transport

Economic estimation of future investments in infrastructures and transportation of the Ministry of Public Works

Motivation◦ Goals:

◦ Analyse the airlines reaction when the HSR starts operating in the same route.◦ Analyse whether the HSR entrance has favoured or not the market in terms of passengers.

◦ Scarcity of previous works regarding this topic.◦ Conventional railways did not compete with airlines because of the differences in time.

◦ Few works summarised most of the HSR experiences throughout the world.◦ Park, Y. and Ha, H.K. (2006) Analysis of the impact of high-speed railroad service on air transport demand. ◦ Campos, J., and Gagnepain, P., (2009) Measuring the intermodal effects of high-speed rail. ◦ Gourvish, T. (2010) The High-Speed Rail Revolution: History and Prospects. ◦ Albalate, D. and Bel, G. (2010) High-Speed Rail: Lessons for Policy Makers from Experiences Abroad

◦ None determined specifically the air companies’ reaction when the HSR enters the market.

Data◦ Monthly data from January 1999 to December 2009. ◦ 1188 observations corresponding to 132 months.◦ Data to the route level on air carriers’ frequencies.◦ 9 different routes, all of them were operated by air transport and train services, buy only for four of

them the HSR was in operation, at least one part of the period considered.◦ The routes average distance was 375 kilometres with 910 operations that move 87532 air passengers

per month on average.◦ Monthly operations of direct commercial flights between Madrid and destination. ◦ Variables

◦ Air transport services on operations and passengers. Direct flights from Madrid-Barajas to the other nine airports. ◦ Iberia market share in those routes and monthly passengers and operations. ◦ Data on railways’s passengers.

The airlines reaction models

◦ MOit: number of monthly operations of direct commercial flights between Madrid and destination i in the period t. ◦ Airpassengersit-1: number of air passengers carried in those operations between Madrid and destination i during

period t-1. ◦ Tourism per inhabitant t◦ GDP per capita it◦ Percentage of international routes t

◦ DHSRit: dummy variable that takes value 1 after the entrance of HSR in the route i during period t.

The airlines reaction models

◦ Model 2: with dummies for different routes.

The airlines reaction results First equation:

◦ Airpassengers it-1 ◦ Trainpassengers it: possible explanation: competition.◦ Iberiashare: the higher the degree of concentration in a route the smaller the number of operations

offered. ◦ Distance◦ DHSR: on average the number of air transport operations decreases by 158, out of a total average of 910,

which means 17% reduction.

Second equation:◦ DBCN: negatively correlated◦ DZGZ: negatively correlated◦ DMAL: negatively correlated

Total passengers and market shares

Total passengers and market shares

◦ Data ◦ Annual◦ 99 observations

◦ Models◦ OLS estimation, robust to standard erros

◦ Variables◦ TP: Total Passengers carried in route i and year t◦ ATS: annual Air Transport Share in terms of passengers of the total transport market (air plus railways)◦ IS: Iberia’s Share

Results

◦ Important impact on total demand ◦ Between 41 to 86 per cent increase depending on the route◦ Non conclusive

◦ Air transport total share has been reduced◦ Between 14 and 33 points depending on the route.

Conclusion

◦ The airline’s reaction: the effects on flights frequency◦ Reduction by 17% ,on average, the number of air transport operations

◦ The total passengers and market shares◦ Increasing in total demand◦ Reduction in airlines’ market share

◦ Summary◦ The Spanish railway appear as the winner in the race for the market