Airfare in Domestic Non-Stop Hub-To-Hub Markets: A Time Series Analysis

The purpose of our research is to analyze airfare determinants. The US airline industry provides 11 million jobs to the economy and accounts for 5% of US GDP. The ability of an airline to transport efficiently is an important driver of economic growth. Hence, it is valuable to understand the economic agents and market behaviors of the airline industry in terms of the US economy. In this paper, we analyze historical and present determinants of airfare and aim to deduce what forces have kept airfare high in a recent period of low fuel prices and continued efficiency gains in airplanes and route networks. This paper offers a brief history of the US airline industry since deregulation in 1978 and a review of important empirical research. Previous studies have suggested the consolidation and merging over the past decade has shifted the competitive nature of the market away from pure competition towards monopolistic and duopolistic. We conduct a time-series analysis of airfare in a hub-to-hub airport-pair market. We find that the Delta/Northwest merger has caused a significant increase in the 25th percentile ticket price for non-stop passengers in a hub-to-hub market. Our results also suggest that, since 2001, legacy competition has become less influential on airfare, while low-cost carrier competition has maintained relatively large downward pressure. Our research has important implications regarding the competitive nature of domestic airline markets, which is a critical component of research into the efficacy of potential regulatory policies