IDEAS home Printed from https://ideas.repec.org/p/fda/fdaddt/2006-13.html
   My bibliography  Save this paper

Economies of Density, Network Size and Spatial Scope in the European Airline Industry

Author

Listed:
  • Hugo Salgado
  • Manuel Romero-Hernández

Abstract

In this article we use four different indices to measure cost performance of the European Airline Industry. By using the number of routes as an indicator of Network Size, we are able to estimate indicators of Economies of Density, Network Size and Spatial Scope. By estimating total and variable cost functions we are also able to calculate an index of the excess capacity of the firms. For this purpose, we use data from the years 1984 to 1998, a period during which several deregulation measures were imposed on the European airline industry. Our results suggest that in the year 1998, almost all the firms had Economics of Density in their existing networks, while several of the firms also had Economies of Network Size and Economies of Spatial Scope. These results support our hypothesis that fusion, alliance, and merger strategies followed by the principal European airlines after 1998 are not just explained by marketing strategies, but also by the cost structure of the industry.

Suggested Citation

  • Hugo Salgado & Manuel Romero-Hernández, 2006. "Economies of Density, Network Size and Spatial Scope in the European Airline Industry," Working Papers 2006-13, FEDEA.
    • Handle: RePEc:fda:fdaddt:2006-13
    as

    Download full text from publisher

    File URL: https://documentos.fedea.net/pubs/dt/2006/dt-2006-13.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Papke, Leslie E. & Wooldridge, Jeffrey M., 2005. "A computational trick for delta-method standard errors," Economics Letters, Elsevier, vol. 86(3), pages 413-417, March.
    2. Mohring, Herbert, 1972. "Optimization and Scale Economies in Urban Bus Transportation," American Economic Review, American Economic Association, vol. 62(4), pages 591-604, September.
    3. John C. Panzar & Robert D. Willig, 1977. "Economies of Scale in Multi-Output Production," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 91(3), pages 481-493.
    4. Panzar, John C & Willig, Robert D, 1981. "Economies of Scope," American Economic Review, American Economic Association, vol. 71(2), pages 268-272, May.
    5. Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
    6. McFadden, Daniel, 1978. "Cost, Revenue, and Profit Functions," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.),Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1, McMaster University Archive for the History of Economic Thought.
    7. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    8. Severin Borenstein, 1992. "The Evolution of U.S. Airline Competition," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 45-73, Spring.
    9. Hansen, Mark M. & Gillen, David & Djafarian-Tehrani, Reza, 2001. "Aviation infrastructure performance and airline cost: a statistical cost estimation approach," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 37(1), pages 1-23, March.
    10. Ng, Charles K & Seabright, Paul, 2001. "Competition, Privatisation and Productive Efficiency: Evidence from the Airline Industry," Economic Journal, Royal Economic Society, vol. 111(473), pages 591-619, July.
    11. Baltagi, Badi H & Griffin, James M & Rich, Daniel P, 1995. "Airline Deregulation: The Cost Pieces of the Puzzle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 245-260, February.
    12. Leonardo J. Basso & Sergio R. Jara-Díaz, 2005. "Calculation of Economies of Spatial Scope from Transport Cost Functions with Aggregate Output with an Application to the Airline Industry," Journal of Transport Economics and Policy, University of Bath, vol. 39(1), pages 25-52, January.
    13. Richard H. Spady & Ann F. Friedlaender, 1978. "Hedonic Cost Functions for the Regulated Trucking Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 159-179, Spring.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Leonardo J. Basso & Sergio R. Jara-Díaz & William G. Waters, 2011. "Cost Functions for Transport Firms," Chapters, in: André de Palma & Robin Lindsey & Emile Quinet & Roger Vickerman (ed.), A Handbook of Transport Economics, chapter 12, Edward Elgar Publishing.
    2. Romero-Hernandez, Manuel & Salgado, Hugo, 2005. "Economies of Density, Network Size and Spatial Scope in the European Airline Industry," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt9609m6hs, Institute of Transportation Studies, UC Berkeley.
    3. Jara-Díaz, Sergio R. & Cortés, Cristián E. & Morales, Gabriela A., 2013. "Explaining changes and trends in the airline industry: Economies of density, multiproduct scale, and spatial scope," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 60(C), pages 13-26.
    4. Leonardo Basso & Sergio Jara-Díaz, 2006. "Distinguishing Multiproduct Economies of Scale from Economies of Density on a Fixed-Size Transport Network," Networks and Spatial Economics, Springer, vol. 6(2), pages 149-162, June.
    5. Johnston, Ahren & Ozment, John, 2013. "Economies of scale in the US airline industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 51(C), pages 95-108.
    6. Batarce, Marco, 2016. "Estimation of urban bus transit marginal cost without cost data," Transportation Research Part B: Methodological, Elsevier, vol. 90(C), pages 241-262.
    7. Leonardo J. Basso & Sergio R. Jara-Díaz, 2006. "Are Returns to Scale with Variable Network Size Adequate for Transport Industry Structure Analysis?," Transportation Science, INFORMS, vol. 40(3), pages 259-268, August.
    8. Batarce, Marco & Galilea, Patricia, 2018. "Cost and fare estimation for the bus transit system of Santiago," Transport Policy, Elsevier, vol. 64(C), pages 92-101.
    9. Richard Nehring & Jorge Fernandez-Cornejo & David Banker, 2005. "Off-farm labour and the structure of US agriculture: the case of corn/soybean farms," Applied Economics, Taylor & Francis Journals, vol. 37(6), pages 633-649.
    10. Finn Førsund & Lennart Hjalmarsson, 2004. "Are all Scales Optimal in DEA? Theory and Empirical Evidence," Journal of Productivity Analysis, Springer, vol. 21(1), pages 25-48, January.
    11. Barros, Carlos Pestana & Wanke, Peter, 2015. "An analysis of African airlines efficiency with two-stage TOPSIS and neural networks," Journal of Air Transport Management, Elsevier, vol. 44, pages 90-102.
    12. Giancarlo Moschini, 1988. "A Model of Production with Supply Management for the Canadian Agricultural Sector," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(2), pages 318-329.
    13. Clougherty, Joseph A., 2004. "Integrating Industrial Organization and International Business to Explain the Cross-National Domestic Airline Merger Phenomenon," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 19, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    14. Zuidberg, Joost, 2014. "Identifying airline cost economies: An econometric analysis of the factors affecting aircraft operating costs," Journal of Air Transport Management, Elsevier, vol. 40(C), pages 86-95.
    15. Fielbaum, Andrés & Jara-Diaz, Sergio & Gschwender, Antonio, 2020. "Beyond the Mohring effect: Scale economies induced by transit lines structures design," Economics of Transportation, Elsevier, vol. 22(C).
    16. Burton, John & Hanlon, Pat, 1994. "Airline alliances: cooperating to compete?," Journal of Air Transport Management, Elsevier, vol. 1(4), pages 209-227.
    17. Rich, Daniel P., 2004. "6. Productivity, Technical Change And Labor Relations In Transportation Industries," Research in Transportation Economics, Elsevier, vol. 10(1), pages 109-135, January.
    18. Yucheng Chen & Stephanie A. Gernant & Charlie M. Upton & Manuel A. Nunez, 2022. "Incorporating medication therapy management into community pharmacy workflows," Health Care Management Science, Springer, vol. 25(4), pages 710-724, December.
    19. Anming Zhang & Yimin Zhang & Joseph A. Clougherty, 2011. "Competition and Regulation in Air Transport," Chapters, in: André de Palma & Robin Lindsey & Emile Quinet & Roger Vickerman (ed.), A Handbook of Transport Economics, chapter 35, Edward Elgar Publishing.
    20. Sveinn Vidar Gudmundsson, 2011. "Liberalization of Air Transport," Chapters, in: Matthias Finger & Rolf W. Künneke (ed.), International Handbook of Network Industries, chapter 14, Edward Elgar Publishing.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fda:fdaddt:2006-13. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Carmen Arias (email available below). General contact details of provider: https://www.fedea.net .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.