Wednesday, August 16, 2006

Air Traffic Delays and Customer Willingness to Pay

(I love economcis and the fact any event could be observed from different points. This is a summary of research i found interesting regarding air traffic delays, their economic impact and demand consequences. )
Air traffic delays are both a major source of passengers’ complaints and a topic of discussion for authors of different disciplines studying the aviation industry. They also cost airlines dearly; it is predicted that by 2010 the cost of air traffic delays would reach $7.8 billion in the United States (Kostink, Gaier, Long 2000).
Morrison and Winston (1989) estimate the effect of flight delays on airline demand; they discover that an increase in the length of delays reduces passenger’s willingness to pay.
The question of service quality and competition is not new; Spence (1975 and 1976) studied the effect of competition on service quality and established the relationship between competition in market and service quality. Mayer and Sinai (2003), Mazzeo (2003) and Rupp, Ownes, Plumly (2003) studied the relationship between service quality and competition in airline markets, considering air traffic delays a signal of service quality. While Mayer and Sinai find that delays are longer in more competitive markets, Mazzeo and Rupp et al conclude the opposite. Suzuki (2000) found out that market shares are positively correlated with on-time airline performance, thus an airline with too many air traffic delays is less likely to retain its market share.
Januszewski (2004) also studied the relationship between air traffic delays and airfare pricing taking into account the level of competition present in the market. He estimated the price responses to longer flight delays in competitive and non-competitive markets. He found out that the prices fall sharply in competitive markets but not in non-competitive markets. He also pointed out that although air traffic delays affect the demand for air travel as well as its costs, he has observed no reduction in the number of flights on a route when flight delays increase. He suggests that each minute delay reduces the willingness to pay by $2.92. These findings are consistent with those of Borenstein (1990 and 1992) which highlight the market power and competitive advantage that can result from airport dominance. Borenstien work on the relationship of market structure and pricing behavior is remarkable. He adds the delays to market power an airline exercises in its hub.

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